Graves: Yale invests the right way

In recent weeks the Responsible Endowment Project and Undergraduate Organizing Committee have gained attention on campus by alleging the Yale Investments Office has made unethical investments. One of their two primary complaints is that Yale’s investment in HEI Hotels and Resorts, a private equity fund manager that acquires and manages hotels, is an unethical one. They also argue the University must increase endowment transparency to allow for greater oversight. To make sure their voices are heard, they have wrote to this paper and staged a sit-in at the Yale Investments Office.

Although the recent controversy may have soured some students’ opinions of Yale’s investments, in reality, we all should be holding our heads high. Yale is one of the most ethical institutional investors and the University’s chief investment officer, David Swensen, is one of the most ethically trustworthy managers in the business. What the UOC and Responsible Endowment Project fail to grasp is that opacity is a necessary part of responsible institutional investing and that the HEI Hotel and Resorts controversy is in part a union issue and is not necessarily a matter of ethics.

Although accounting transparency is vital to the ethical governance of a corporation, investment transparency is universally destructive to endowments and other large investors. When Yale makes an investment or employs a particular strategy, the confidentiality of its operations is of paramount concern. A large portion of Yale’s excellent returns comes from the ability of the Investments Office to locate and invest in talented and ethical fund managers, who come from domestic equity funds, hedge funds, private equity funds, real estate funds, timber funds, and oil and gas funds, among other parts of the investment world. The Yale Investments Office takes great pains in locating these managers and making its other investments, and if everyone were to have a complete list of Yale’s holdings and asset allocations, this work would be for naught — everyone would rush to invest in the same holdings as Yale, and our returns would be diluted by copycats.

The UOC fails to understand the fundamental fact that the investment world relies on the protection of intellectual property. If Yale’s endowment were to become as transparent as the UOC desires, the Yale portfolio would become common knowledge, and Yale’s returns would cease to be extraordinary. Just as Coca-Cola and the best chefs protect their secret recipes to prevent others from destroying their businesses by copying them, the Yale Investments Office keeps its holdings from the public. To generate long-run returns that will keep the University healthy and help it weather hard times like these, Yale must keep the portfolio opaque.

Although many institutions must balance opacity and oversight, Yale has developed an effective system to achieve both goals. At Yale, the main body responsible for creating guidelines for responsible investing is the Corporation Committee on Investor Responsibility, which is aided by the Advisory Committee on Investor Responsibility, a committee on which two students serve. In establishing these organizations in 1973, Yale became a pioneer for ethical institutional investing. Providing further oversight, the Yale Investment Committee oversees the entire portfolio.

On top of this, Yale has another force driving responsible investment. An organization is often only as ethical as its leaders, and David Swensen is recognized by the financial industry as one of the most conscientious and ethical institutional investors. Yale’s endowment is in good hands — both financially and ethically.

The HEI conflict is emblematic of student misunderstanding of the Yale investment process and ethical mission. This conflict gained publicity at Yale because the union of which some Yale workers are a part got students to advocate for their fellow workers who work for HEI and might unionize. Violations of workers’ rights must be addressed if they are substantiated, but the current campaign to paint as unethical Yale’s investment in an organization with a union conflict is intellectually dishonest.

The recent sit-in at the Yale Investments Office was inappropriate because the UOC engaged in heavy-handed tactics suitable only for extreme cases, and certainly not appropriate given the circumstances of this case. A campus rally for union organizations would be appropriate advocacy, but a sit-in that disrupts investment professionals striving to protect our University from tough financial times is not.

Daniel Graves is a senior in Ezra Stiles College.


  • Anonymous

    "The UOC fails to understand the fundamental fact that the investment world relies on the protection of intellectual property."

    Not to pick a bone with your argument overall, but what form of intellectual property is this, exactly? I don't see how a simple list of investments can be copyright or patented. Perhaps it could be a trade secret, but even that sounds suspect, and from what I understand trade secrets protect ways in which the information can be disclosed, rather than the information itself.

    You should have said that the investment world relies on the maintenance of secrecy. Intellectual property has pretty much nothing to do with this, and the use of the term here only serves to add to public confusion about what IP is.

  • milt tomkins

    This is a good post..I’m glad I found it. I will quote from it in my thesis about hedge fund operators. I also learned a lot about hedge fund trading strategies from 2 other great books. Hedge Fund Trading Secrets Robert Dorfman..and Confessions of a Street Addict of course by Jim Cramer..written before he got really famous..both are riveting and very informative. You should check them out if you like reading behind the scenes stuff about hedge fund and what methods they use..….. following Dorfman’s strategies my winning ratio is now better than ever

  • who are you talking to?

    Mr. Graves fails entirely in engaging with the specific asks of the REP or the UOC in this article. If he had come to the REP event, read any of the other articles in this newspaper about the issue, or thought he creatively he would have discovered the flaws in his own argument. No one is asking Yale to make all of its investments known to the entire world, and no one involved in REP or UOC is at this point uninformed about how David Swensen makes money for Yale (or for that matter against the general principles on which he does this). Instead, the asks are for Yale to do a better job at balancing oversight and money making. If Mr. Graves had done any serious research he would have found out how impotent and inactive the ACIR actually is. The body does not do any investigation of issues, have access to more knowledge than the broader community about Yale's investments, or have any power over Mr. Swensen if they actually decided to take action on an issue. What the UOC is trying to point out is that Yale is invested in an unethical company. Mr. Graves seems to be unaware that in this country, organizing into unions is a RIGHT and therefore its violation is illegal. Just because we currently have a 100% pro-business National Labor Relations Board that does not enforce the law, doesn't mean such actions are not still illegal. What the Responsible Endowment Project is trying to do is have a conversation on this campus about oversight to the endowment based on the fact that Yale is invested in one and could be invested in more unethical companies. Guidelines put in place in 1973 are just unable to deal with the realities of investment in the 21st centuries, our endowment now looks absolutely nothing like our endowment then. And would changes such as an ACIR that knows Yales investments (and is sworn to secrecy) or delayed (by 3,4, 5 years) transparency to the whole community really hurt Mr. Swensens ability to make money, or would it just reveal investments he does not want to reveal. These are just 2 of numerous proposals the group is considering. If you also think there can be a middle way between the current situation and what Mr. Graves decries then you support exactly what the UOC and REP want.

  • Sarah

    Daniel: google "delayed transparency". Did you even go to the REP event?

    Also, you're conflating the UOC and REP here. The UOC's HEI campaign is a specific issue within a network of issues being addressed by REP. The forestry issues, for example, more straightforwardly conflict with Yale's professed "environmentalism". The REP project as a whole is unquestionably relevant and points out a real hypocrisy within Yale's mission.

  • really?

    Since when have copycats ever hurt an investor? If Yale buys an investment and then everyone else buys the same investment, the stock will just rise higher. Yale would make even more money. It's the same reason why Warren Buffet always announces publicly the companies he's investing in. This whole article is based off a somewhat poor understanding of how markets work.

  • economic crisis, anyone?

    "An organization is often only as ethical as its leaders, and David Swensen is recognized by the financial industry as one of the most conscientious and ethical institutional investors."

    I am simply amazed that anybody, given the current state of the economy and the disaster that the financial industry has created through its dangerous investment practices, could take the opinion of the financial industry about ANYTHING when it comes to ethics and social responsibility seriously.

  • J

    #5 - Knowledge of a major player's holdings are not only helpful simply because you can copy them; they have far greater utility than that.

    Graves raises several excellent points in defense of some opacity for the Yale endowment, which, incidentally, is set to lose a substantial amount of money this year. None of these points is effectively rebutted by the comments assailing him for his choice of topic.

  • H.

    #1: Investment models and platforms are IP. An investment model and platform is more than just a list of stocks and funds. Its a program of formulas and equations used to rate potential investments and determine how much should be invested in them. In addition such models take into account how much the institution should invest in various types of investments given the current and projected future economic conditions. If Yale continuously published the investments it made, it would make keeping investment models and platforms a secret useless.

    #3/4. Delayed transparency doesn't work as easily in the investment sphere as it does in the government sphere. When would it kick in? X years after the money is invested, or X years after the investment is finally sold? In the earlier case, that would compromise Yale's investment models and platforms. In the latter, it would be useless for investments (of which there are many) kept in the portfolio for extended periods of time.

    #5. Yale invests in more than just "stocks." While Warren Buffet may reveal what stocks in which he personally invests, Berkshire Hathaway does not reveal its investment models.

    #6. Get over yourself. David Swensen did not precipitate the economic crisis any more than the common American did.

  • Jessica

    Thanks for this article. I understand the posts that are being made in response by various other commentators, and I appreciate their qualifications of the UOC's mission, but I also appreciated your clear defense of the university. A very cool-headed, concise summary of important considerations.

  • Chris Y

    #3: While unionizing is a right, so is not unionizing. The card check which the Unite Now union, and the students on campus which they are using, makes union votes non-confidential and allows unions to coerce individuals to join. That is unconstitutional, even more so than the current law of requiring all employees in a company to be unionized if some are, even against their will.
    #4: Currently Yale is considered one of the ideal investors to a management firm. We have a lot of money, we keep our investments secretive and we know what we are doing. One reason we do so well is that in addition to choosing good managers, these managers choose to accept Yale’s money. We also maintain relationships for decades, not 1 year periods, so a “delayed transparency” system wouldn’t do by anything unless it was delayed for 20 or 30 years. If companies were worried that 3 years from now they were going to have a backlash from student activists being used by unions they would be reluctant to accept Yale’s money. I’m sure HEI is reconsidering their relationship with us right now.
    #5: Yes, announcing your investments helps generate returns in the short term. It also brings in low-quality investors who are likely to sell for little reason, making a stock volatile for no reason. Volatility is bad except in very special cases. Warren Buffet makes his investments through a publicly traded company called Berkshire Hathaway. Publicly traded means he does not have a choice but to announce his investments. He gets such good returns because he is able to get preferential deals. Look at his recent investment in Goldman Sachs. In addition, he maintains a stock price on Berkshire Hathaway A of $120,000 to keep these “sap” investors out who buy and sell without thinking and create volatility. Dan understands very well how markets actually work, unlike # 5. Another thing #5 doesn’t realize is that Yale doesn’t buy stocks which go up or down in value, but rather invests in managers, which don’t accept unlimited funds from investors. They only accept, say, $300 million per fund they establish, which a company like Chieftain, who we invest in, could raise in hours. As a result, all that matters is being considered an ideal investor, like Yale is right now, but wouldn’t be if we revealed any more of our managers to students who will find something to complain about no matter what. Rather than criticizing Dan’s understanding of the market, which is thorough, why don’t you read Swensen’s book and actually gain an understanding of how investing work. No one I spoke to involved with REP had even looked at his book, which would answer all of their issues.
    #6: The economy is in the state it is currently in for two reasons. First, companies took on unnecessary leverage, which was a huge mistake but easy to make due to the pressures from shareholders. Irresponsible: yes, unethical: no. The second problem was that politics prevents the government from engaging in counter-cyclical economics. Rather than cutting spending and slowing down economic growth, which would bring criticism from constituents, they allow rapid growth and only attempt to engage in counter-cyclical actions when the economy turns down, as it is now. Fiscal or monetary contraction would have limited the amount of capital available or brought with it a higher cost. This would have limited the amount of leverage. A monetary tightening would have also prevented homeowners from taking on the levels of debt that they did, which would have prevented the housing bubble which led to the collapse of the economy. This, again, may have been irresponsible, but not unethical. Yale literally wrote the book on ethical investing (“The Ethical Investor: Universities and Corporate Responsibility, 1972). Please do not relate things like how Yale invests, which is of the highest ethical standards, and the economy which you do not understand at all clearly.

  • Katie H '11

    I'm really interested in the arguments that are being made here. Clearly there are a lot of people who know a lot of things.

    To H. and Chris Y., who both seem to know a lot about the issues, as a member of REP and I'd be interested in hearing what you think about the issue of ethics. The issues you raise with the idea of transparency certainly need to be addressed. But, just as you don't think earlier commenters really engaged with the substance of Dan's argument, I don't think any of the people arguing on your side side--that opacity is non-negotiable--have engaged with the issue of ethical investing. Should we just drop it altogether?

    Private oversight within the investment office has been shown to have some flaws by investments that have slipped through the cracks somehow: not just HEI, which you may or may not see as an ethical issue (although I certainly do), but Baca Ranch, Darfur, and direct deals with South African banks during apartheid. Must we ignore issues of that scale in the name of the bottom line, or is there some happy medium between total financial disaster and total lack of oversight?

  • Y11

    I have to laugh at #6. Hee hee! Although it would have been funnier if you'd just said "ANYTHING."

  • Chris Y

    Katie H., I think that REP is taking an overly simplified view of what is ethical. The labor unions and environmentalists found two of our investments, those in timber fields and those in HEI, and were able to use students to help them achieve their goals. In reality, every single investment could be seen as unethical by some group. If we invest in a manager who buys stock in an un-unionized company, unions will convince students that this is the worst thing in the world so that the company may be forced to make concessions they otherwise shouldn't make. If we invest in a company which sells meat, PETA would be upset and try and convince vegans and vegetarians on campus to make a movement and disrupt operations at the Investments Office. At least 95% of companies would offend environmentalists who oppose investment in companies which contribute to greenhouse gasses and global warming.

    I think one thing you are failing to consider is that you are getting a biased side of each HEI and the timber fields by the unions and environmentalists, while Yale stays quiet about it as a responsible investor should do. We have an investment oversight committee which is necessarily opaque, for reasons I discussed earlier, but by no means powerless. I don't know who is on it for sure, but I would bet President Levin is. If you have environmental issues with how we invest our endowment, consider that President Levin is considered one of the leading University Presidents when it comes to environmentalism, and is regularly called before Congress to speak on behalf of universities on matters of environmentalism. While you only hear one side of the issues with investing in timber, he hears all sides and then makes an ethical decision.

    As for criticizing Yale for non-divestment, I believe that for the most part divestment is not an effective means of getting anything done. If you divest from a country, it doesn't directly damage the company and you are cutting off your say in the region. Rather than automatically adopting a policy like divestment, like politicians under pressure from constituents often do, I'm glad an educational institution like Yale took the time to consider the real impact of divestment on the country. Very often divestment ends up making things worse. As for whether there is some happy medium, I think it is where we are right now. Rather than give into every cause which funds students so that they can protest, we consider every aspect of an investment. I honestly doubt you could name a possible investment idea which doesn't use up some resource, contribute to greenhouse gasses or make some of their employees unhappy. You could even make a decent case to protest investing in US Treasury Bills due to some of the wars we are involved in or our non-involvement in Darfur or other problem regions. What would really be irresponsible is blindly and automatically giving into whatever cause is important to students today, such as HEI or timber fields are right now, at the expense of students in the future.