Socially responsible investing just received a big endorsement, but what it really needs is some clarity.
Yale University announced last week that its endowment might exit private investments it deems unethical, extending a policy it has long applied to investments in public markets. In fact, the university counts itself among SRI’s pioneers. Its ethical investment policy declares that “Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors.”
Given the influence of Yale’s $29.4 billion endowment — second in size only to Harvard University’s $39.2 billion trove — the announcement will undoubtedly raise SRI’s profile. But SRI and the broader sustainable investing industry have never lacked attention. As my Bloomberg colleague Eric Balchunas recently pointed out, sustainable investing enjoys “to-die-for PR that eludes most categories.”
That attention hasn’t yet translated into investment, however, at least as judged by flows to exchange-traded funds. Just $6.6 billion of the $3.5 trillion in ETFs, or 0.2 percent, is invested in the category. Balchunas offers fund providers some sensible tips for sparking more interest, including lowering fees, choosing snazzier names, offering more concentrated portfolios and preaching to a broader audience.
But the industry has a more fundamental problem: Investors are lost among the various styles in the sustainable investing zoo. If the industry wants to attract investors, it must first explain what it has to offer.
Lots of people want to invest like elite university endowments, but securities laws don’t allow it. It’s time to remove those barriers.
But it’s worth asking whether investors should aspire to the so-called endowment model in the first place. According to numbers compiled by the National Association of College and University Business Officers, universities with the biggest endowments generated an average return of 9.7 percent annually over the last 30 years through June 2017 — the longest period for which annual returns are available — slightly edging out the S&P 500 Index’s return of 9.6 percent, including dividends.
Admirers of the endowment model are quick to point out that it’s less volatile than the stock market. The better comparison, they say, is a traditional 60/40 portfolio of stocks and bonds. That mix, as represented by the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index, returned just 8.6 percent over those three decades, or 1.1 percentage points a year less than endowments.
A group of 11 Harvard alumni has a plan to boost the university’s straggling endowment, but it’s not the magical fix the members imagine.
In an open letter to Harvard’s new president, Lawrence Bacow, the group recommends that the endowment move at least half its assets to a low-cost S&P 500 index fund. It’s a “radical new endowment strategy,” the alumni acknowledge. Harvard, along with other big university endowments, pioneered and still uses the so-called endowment model of investing, which calls for investments in high-priced hedge funds and private assets alongside traditional stocks and bonds.
A radical step is necessary, the alumni say, because Harvard faces a “fiscal crisis” from a new tax on wealthy university endowments. According to Bloomberg News, Harvard estimates that “the new 1.4 percent tax would have cost the endowment $43 million last year.” The group’s plan would use the money saved on well-compensated managers to pay the tax.