Report critical of colleges’ risk-taking

A new report says endowments like Harvard’s made too many risky investments in the run-up to the financial crisis. A new report says endowments like Harvard’s made too many risky investments in the run-up to the financial crisis. (David L. Ryan/Globe Staff)
By Beth Healy
Globe Staff / May 21, 2010

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Large endowments like those at Harvard University and Dartmouth College took on too much risk and helped fuel Wall Street’s meltdown, according to a new report, which charges that such schools threatened their financial stability by abandoning their historic mission to preserve assets.

The heavy risk-taking that yielded billions of dollars in profits while markets were going up failed during the financial collapse of 2008 and 2009, according to the report, issued yesterday by the Center for Social Philanthropy in Boston.

“By embracing the high-risk model, you end up embracing volatility,’’ said the report’s author, Joshua Humphreys, a Harvard history lecturer. The earlier investment gains, he said are “an illusion if then, on the downside, the volatility requires such gross austerity measures.’’

Harvard University, whose endowment plunged 27 percent to $26 billion in the school year that ended last June, fired workers, froze pay, and cut budgets — and issued new debt — to deal with its sudden drop in cash flow from the endowment. It also shelved an ambitious plan to expand the campus into Allston.

Humphreys’s study, partially financed by the Service Employees International Union, also examined the endowments of Boston College, Boston University, Brandeis University, and the Massachusetts Institute of Technology.

The study suggests that by taking on too much risk universities added to the economic troubles of their communities rather than helping shore them up. “Allston is the worst-case scenario in terms of the social cost,’’ Humphreys said.

Harvard declined to comment on the report, as did Boston University and MIT. But Harvard endowment chief Jane Mendillo recently defended the school’s investment approach in a letter to alumni, saying it had generated 20-year average returns of 11.7 percent per year, vs. 7.8 percent for a basic stock-and-bond portfolio.

“This additional investment performance has helped to fund many of the leading edge financial aid policies, research breakthroughs, and educational initiatives that Harvard has pursued over the years,’’ she wrote.

Managers of large endowments, foundations, and pensions have long embraced the practice of spreading money across a variety of investments, to help hedge against market downturns. But in the financial crisis, virtually every asset class plunged. Humphreys said massive money pools like Harvard’s provided capital to Wall Street for derivatives and other toxic investments that helped topple the financial markets.

Humphreys also takes aim at the boards of the biggest endowments, saying the members come largely from the investment industry who may have led the schools into complex investments. “These people are desensitized to the risks that they take in their lives every day,’’ Humphreys said. “Their mandate is to take oversized risk.’’

The Dartmouth board, Humphreys argues, is laden with conflicts of interest because a half dozen trustees work at firms that have managed more than $100 million of the endowment’s money.

Dartmouth defended its practices, saying it applies high ethical standards to the board of its $2.8 billion endowment.

“We see no reason to disadvantage Dartmouth financially by refraining from any investments’’ with ties to trustees that are legal and proper, the school said in a statement. “To do so when we are following appropriate ethical standards would do nothing more than negatively impact the returns on our endowment and the good work that we do with those returns.’’

Humphreys offers praise for the smaller Boston College endowment, saying, “It’s not a coincidence that BC hasn’t fired anybody, because half their portfolio is liquid. That has afforded them a level of resilience that has allowed them to continue to fulfill their mission.’’

By “liquid,’’ Humphreys means the $1.5 billion endowment invests largely in stocks and bonds — assets that can be easily bought and sold. Many large endowments have significant portions of their money in hedge funds, private equity, and other alternative investments, which can produce outsize returns over time but which also can tie up cash for longer periods. In the market collapse, for example, Harvard has acknowledged that it was unable to access billions of dollars it had entrusted to outside hedge funds.

Boston College confirmed that it has not let go of staff since the financial crisis. “That’s been a point of pride for the university,’’ BC spokesman Jack Dunn said.

Brandeis, in Waltham, lost 17 percent of its half-billion-dollar endowment in the last fiscal year. The school reported deep deficits in its budgets, and laid off 82 people, according to the report. It also nearly closed its Rose Art Museum, a decision that sparked outrage on campus and in art and philanthropy circles. The school ultimately decided to preserve the museum, but the ordeal was a result of volatility in the endowment, Humphreys argues.

Brandeis spokesman Andrew Gully said, “Relative to our peer schools, however, the diversified Brandeis investment portfolio performed better than many, and we’re pleased with our performance over the last year.’’

Beth Healy can be reached at