Editorial: Investment Matters; Dartmouth's Endowment
Published in print on November 7, 2010
An investigative report by special correspondent Rick Jurgens in the Sunday Valley News Oct. 31 exposed the cozy relationship between Dartmouth College and a group of wealthy alumni who serve as financial stewards of the college while also managing private funds in which the college invests. Perhaps the arrangement -- not unusual among elite institutions -- represents a kind of vertical integration good for business: The college churns out graduates, some of whom become money moguls who eventually become trustees or investment committee members; the Board of Trustees then invests in funds owned or managed by some of them. If all goes well, both the college and those alumni money managers reap the profits.
The arrangement would seem to be mutually beneficial, but it carries risks as well as rewards. When a college transacts business with the companies of its board members, there is not only the potential appearance of conflict but also the potential for real conflict. Trustees have a responsibility to guard the financial interests of the college. When they also have a personal interest in increasing the size of the funds they manage, those interests could collide.
As Jurgens reported, the Dartmouth endowment, on which the college relies to help pay for operations, has a sizable stake in "alternative investments" managed by some of those closely associated with the governance of the college. Chief among them is Lone Pine Capital, whose owner, Stephen F. Mandel Jr., assumed the role of acting chief investment officer in 2009, chaired the trustees' investment committee and now serves as chairman of the Board of Trustees. The college has invested $110 million with Lone Pine hedge funds, as well as more than $110 million in other private funds associated with current or former trustees and investment committee members. The college also invests in funds with ties to a group of wealthy alumni donors who serve on the President's Leadership Council.
All told, these private-investment funds tied to college insiders represented about 11.6 percent of the total endowment in mid-2009, when it was valued at $2.8 billion (the value has since risen to $3 billion). They make up part of a portfolio weighted with high-risk assets that expose the college to the volatility of the global capital markets -- as happened in 2008, when the endowment plummeted from $3.6 billion to $2.8 billion and thrust the college into a financial crisis.
Trustee Charles Haldeman Jr., who chaired the Board of Trustees from 2007 until June, defends the college's investment strategy: "Some of (the) world's leading money managers are Dartmouth alumni involved with their alma mater," he wrote in response to questions from the Valley News. "Had we chosen to exclude these funds as an option for our investment staff simply because of a connection to an alum involved in the governance of the College, our endowment returns would have been lower." Indeed, the alumni-related funds yielded an average annual return of 26.5 percent over a period when Dartmouth's investment in all such funds returned 17.8 percent.
The college maintains what it calls a "rigorous" conflict-of-interest policy requiring trustees and those serving on the investment committee to disclose any personal financial interest in investments under consideration, to refrain from any discussion of them, and to recuse themselves from voting. State and federal laws also require the college to publicly disclose information about transactions in which college insiders have a financial interest.
But it strikes us as far-fetched that governance boards as top heavy with investment-fund managers as Dartmouth's can ever act in a truly disinterested manner when it comes to investments involving their board colleagues. It would seem difficult for fellow trustees to provide proper oversight of investments managed by other trustees, especially when one is the chairman of the board. The problem is magnified by the composition of the Dartmouth board; 78 percent of its members represent business and finance, according to the nonprofit Center for Social Philanthropy at the Tellus Institute, which issued a report earlier this year on the inherent risks of alternative investment strategies used by many colleges and universities to boost endowment returns. A more diverse board of trustees would be a step in the right direction.
Jurgens' report pulled back the curtain on some of the college's investment practices. The information is important because the endowment is critical to the financial viability of the college and, by extension, the community, which to no small degree is economically tied to it. But it shouldn't take an investigative reporter with access to nonpublic information to reveal details. An institution dependent on public funds and ostensibly dedicated to free and open inquiry ought to provide a more thorough accounting of its endowment assets and how those assets are managed.