When making investment decisions, there will always be the question of whether or not it will be worth the risk to invest in a product without further investigation. We hear when individuals lose after making a risky decision, we know that the risk usually affects just that one person, or possibly others who may be directly connected with that individual. Higher education institutions are not immune to being affected by risky investment decisions. The decisions made by investment managers for higher education institutions can affect the budgets for each academic year.
Yale University is an example of an institution that was affected by the risky investment decisions made by its investment manager. Yale’s average annual return for the last 20 years would equate to at least 16%. In 2008, Yale’s endowments reached $23 billion. As of 2009, the value of the current investments was ¼ the value of previous investment. (The Chronicle, 2009). Due to the lower returns that the institution received, the administration considered layoffs as well as delaying construction projects that were planned for the institutions. (The Chronicle, 2009).
Risky investments by investment managers can affect an administration’s hiring decisions, as well as affect the amount of endowment funds taken in annually. Requests for more donations towards endowments as well as further fund-raising opportunities are possibly sought after feeling the effects of a risky investment. (Pulley, 2002). After losing money due to investing in risky investments, such as real estate and various other stocks, some investment managers may even look to placing the institution’s money into hedge funds. The returns may still be low, but the risk has been lower than other stocks.
In order to avoid risky investment decisions, investment managers as well as the other administration leaders should do more research prior to making investment choices (Pulley, 2002). If the investment manager, endowment manager, or even the financial manager is making all of the decisions, other members of the administration should at least be familiar with what will ultimately be the final decision.
The Chronicle of Higher Education (2009). 13 Reasons Colleges Are In This Mess: How greed, incompetence, and neglect led to bad decisions. http://chronicle.com/article/13-Reasons-Colleges-Are-in/33943/.
Pulley, J. (2002). Betting the Endowment on Risky Investments. The Chronicle of Higher Education. http://chronicle.com/article/Betting-the-Endowment-on-Risky/32798/.
Its scary to believe that in some colleges and systems of higher education there are one to three people that are making the decisions that will effect not only the college or system, but access to higher education for generations to come.
ReplyDeleteThere needs to be more regulations as it relates to these massive endowments that both private and public institutions are able to carry as supporting assets. Unfortunately, as these powerhouse institutions are continually allowed to have lobbyist and alumni in high places, such increases will never be noted at the level in which will make a difference. Such a misplacement of effort will continue to limit access to higher education for those in most need.
Lawmakers will continue to retreat from the implementation of stronger accountability as long as they can get away with—or at least allow these institutions and individuals get away with it without notice.
Higher education endowments without well defined regulations—another cost disease.
Key Lawmaker Retreats From Plan to Regulate College Endowments: http://chronicle.com/article/Key-Lawmaker-Retreats-From/40388
A firm I once managed, did portfolio management for a number of colleges. Just like investors, college presidents become engulfed in the vision of 'making big money off of investment returns' - unfortunately, they allow themselves to get caught up in those vision and wanted to take big risks. Sometimes, they would listen to our advice and sometimes they would not. "Losers never lose in their mind, but winners always get their cake."
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