Did a dangerous reliance on illiquid assets cause Brandeis’ financial woes?

A think tank has released a report on the model of endowment investing that Brandeis, among other colleges, uses, and it cites us by name. We also get the best report so far on Brandeis’ infamously opaque endowment holdings.

What does the report teach us?

A lot of the report is concerned with models of endowment investment and worker compensation – important insights that I hope the administration looks at, but I’m going to let the Chronicle of Higher Education summarize:

The prevailing endowment investment approach among wealthy universities is “broken,” according the report, which attempts to detail the “cost of the corrosive influence of Wall Street culture on higher-education finance.” […]

Over the last 20 years, those universities and many others moved away from traditional endowment holdings in domestic stocks and bonds, placing more money into illiquid, riskier asset classes, such as private equity, hedge funds, real estate, timberland, oil, and other commodities.

“By giving academic credibility and capital to these risky investment strategies,” the report says, “endowments have been as much contributors to the financial crisis as they were victims of it.”

What else?

Remember when the administration told anyone who would listen that they were trying to sell off the Rose because Massachusetts law? Well, Massachusetts changed the law and Brandeis is still claiming it can sell off whatever it wants. The report points out:

Works of art are hardly liquid assets. They have to be auctioned or  privately sold, so the decision to sell them provides an indication of just how tight a liquidity squeeze Brandeis was in. At the time Brandeis officials repeatedly invoked legal restrictions against spending from endowment principal as a rationale for liquidating the Rose collection, though none mentioned the illiquidity of the endowment’s investments. […]

The case of Brandeis highlights how vulnerable a university’s nonprofit cultural and educational mission can be when constrained by the Endowment Model’s imperative of investment illiquidity.

I remember when I was on the Student Union’s newly-formed Committee on Endowment Ethics and Responsibility we kept getting stonewalled on endowment transparency. The line was that the University endowment was invested in assets so secret that the existence of the investment was not allowed to be known. I didn’t realize the extent of that reality:

what our endowment is made of
The levels of asset type go from liquid/known value (Type I) to illiquid assets (Type III). Note that Brandeis has a big heaping ton of Type III assets.
The endowment is secret, untouchable, and therefore we don’t have a say in how Brandeis votes with its shares of stock or invests or anything like that. Hopefully the new CEER will change that, but for now – opacity. We’ve seen how that turned out.
So, was it debt that created Brandeis financial woes? Or was it an over-reliance on liquid assets that couldn’t be cashed in when it mattered the most? Or both?
We don’t know – we can’t know. Over a year ago Jehuda told two Brandeis students that he would put the entire budget online. He still hasn’t done that, much less embraced endowment transparency.  What we can do is ask the administration to read the report. At the very least they can fix the problems it identifies.
Other things I learned – did you know that Brandeis is Waltham’s largest employer, and pays a union wage of about 16 dollars an hour?

“Brandeis University hired a full-time CIO and began to staff a dedicated Office of Investment Management for the first time in 2007”

And one more thing:

A majority of Brandeis University’s 50 trustees, who made the controversial decision to close the university’s Rose Art Museum to the public and sell off its collection, come from business and finance backgrounds. Among the trustees who sit on the board’s investment committee is Jonathan Jacobson, one of many former Harvard Management Co. portfolio managers who left Harvard to launch his own hedge fund, Highfields Capital Management LP. Jacobson’s firm had reportedly managed investments worth more than $25 million for the Brandeis endowment at the end of fiscal year 2008.


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