A recent New York Times op-ed calling upon Yale to spend more of its endowment has prompted renewed debate — both on campus and among experts — over how the University should invest its money.
On Aug. 19, University of San Diego law professor Victor Fleischer published an opinion column in The New York Times in which he accused Yale, along with other educational institutions of its kind, of “hoarding cash” and valuing investment returns over financial support for students. Fleischer argued that the University should increase its annual spending from the endowment to fund educational purposes rather than placing more money in the hands of asset managers, which Yale uses to manage its endowment. According to Fleischer, about $480 million of Yale’s roughly $24 billion endowment was paid to private equity fund managers as compensation last year, while only $170 million was directed to such things as tuition assistance, fellowships and prizes.
“We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment,” Fleischer wrote in his piece. “The private-equity folks get cash; students take out loans.”
Fleischer specifically called for a law requiring universities with endowments of over $100 million to spend 8 percent of their endowments annually, nearly three percentage points higher than what Yale aims to spend.
Following the publication of the piece, strong criticism emerged from across the web calling upon Yale and other institutions listed — including Harvard, the University of Texas, Stanford and Princeton — to reform their endowment management policy and direct more funds toward scholarship and research.
Most notably, Malcolm Gladwell — bestselling author of “The Outliers” and a New Yorker staff writer — published a stream of tweets in which he accused Yale of focusing more on its money management business than its “declining legacy educating business.”
“I was going to donate money to Yale,” Gladwell wrote from his account, which has over 300,000 followers. “But maybe it makes more sense to mail a check directly to the hedge fund of my choice.”
In an interview with the News, Fleischer said the purpose of his article was not to condemn the work done by the Yale Investments Office or its chief investment officer, David Swensen, whom he described as a terrific investor.
Rather, he said the goal was to force trustees and other leaders at colleges and universities to ask difficult questions about the allocations of their endowment.
“It is really a question of priorities and whether Yale should be spending more to benefit the current generation of students and faculty and scientific research,” he said.
But in the wake of the article, several financial experts, alumni and current students have come to the defense of the Yale Investments Office, arguing that a large increase in spending would not only harm Yale’s portfolio, but also financially disadvantaged students and faculty in the long run. Some financial experts said they believe that an increase in cash flow out of the endowment may be shortsighted for educational institutions such as Yale, whose assets are intended to exist in perpetuity and maintain their value in the long term.
Dan Primack, senior editor at Fortune and author of Term Sheet — a daily newsletter about private equity — said that criticizing Yale’s private equity managers overlooks the fact that many of the fees are tied to performance. As a result, cutting off these investments would mean losing billions of dollars for the University, and more generally, decreasing student payouts.
“The reason that Yale is able to afford year in and year out to spend the amount that they do on student aid, on facilities, on faculty and all the other things that come with going to Yale … is because it has an endowment that performs really well,” Primack said. “The endowment is not automated, it is not something that just sits there and collects interest, it is invested and it is invested well.”
On “Overheard at Yale,” a popular Facebook group in which the article was shared and hotly debated, roughly a dozen students voiced concerns about what they felt was an unfair distribution of funds away from campus and into the hands of Wall Street investors. Others, however, remained skeptical of the arguments made by the piece.
Bernard Stanford ’17 said that while it is true that the University spends a large sum on financial professionals, these payments made to firms cannot be viewed in isolation.
“Since Yale’s endowment contributes a full third of the University’s budget, building up the endowment is incredibly important, and failing to hire — and pay — the best investment managers out there ultimately means less money available for spending on students, faculty and facilities,” he said. “People critical of Yale’s endowment strategy need to see [private equity] fund fees for what they ultimately mean to the University: more professors, better buildings and higher financial aid.”
Alex Fisher ’14 said those who are attacking the compensation arrangements of fund managers are creating a false comparison since that money cannot simply be redistributed to students.
He added that it would be impossible to remove these management fees and expect the endowment returns to go unchanged without these investors’ contributions.
“Fund managers are not charities, and if Yale won’t pay market rates for their work, somebody else will use their expertise instead — if you want a quality product, you have to pay for it,” he said. “Perhaps some would feel ethically pure were the University to invest only in low-yield government bonds, but I doubt that the students of tomorrow would thank them for it.”
Isa Qasim ’15, a former opinion columnist for the News, said that while there are reasonable arguments to be made about fees paid to money managers and the money directed to financial aid, the true purpose of the endowment is to maintain its purchasing power for future generations, and as a result, spending must be kept conservative.
According to the 2014 Yale Endowment report, the target endowment spending rate approved by the Yale Corporation is 5.25 percent.