August 7, 2017

Hampshire College Setting Itself Up for Long-Term Losses

On August 3, Hampshire College President Jonathan Lash and Trustee Dick Hurd published an op-ed in the Huffington Post declaring the decision to divest college funds from energy markets to be both a financial and moral triumph. The pronouncement came five years after Hampshire formally enacted its divestment policy. But a closer look at the institution’s financial performance and mission to divest reveals that Hampshire may be moving in the wrong direction.

Financially, the two college leaders argued the decision to divest was successful because their “average five-year investment returns have performed better (6.4%)” than 800 other colleges and universities whose investment performances are measured by independent groups such as Bloomberg. Morally, the pair believed that “a refusal even to consider the moral and social implications of investments suggests those decisions are not defensible, and that an institution doesn’t live by its own standards.” So, by their logic, the college would have been hypocritical to not investigate the divestment option.

Both of these claims need to be taken with a grain of salt. First of all, a university endowment’s investment goals rarely include achieving targeted short-term gains, such as beating the S&P 500 over a period of a few years. The goal of an endowment is to sustain a university in perpetuity, and therefore it must take a long-term strategic outlook. If a college needs money in the short term, it usually raises cash through a fundraising campaign.

Besides, if Hampshire College is so focused on short-term performance, its endowment is the last thing it should be boasting about. According to its most recent financial report, issued for the 2015-2016 academic year, the endowment actually lost money. The report clearly states, under a paragraph titled “Investments,” that “The net change in the valuation of the college’s investments was a decrease of $2.65 million.”

Ironically, Hampshire College’s tuition for 2017-2018 is now $50,030 for one year of undergraduate education, up from $48,810 the prior academic year. Sure, operating expenses fluctuate often for colleges and universities, giving reason for annual adjustments. But raising the ticket price by over $1,200 from one year to the next is a steep one that could have been eliminated if the endowment had been able to explore more of the market in search of wiser investments. If this trend continues, Hampshire may not be claiming it has a better investment strategy than its peers for much longer, and its students certainly won’t appreciate having to take on bigger loans.

Economists studying the impact of divestment on university finances have previously noted the effects it has directly on students. For example, Dr. Hendrik Bessembinder, Professor of Finance at Arizona State University, has found that divestment’s result in costs to students at private universities is equivalent to $1,043 to $3,265 of additional tuition annually. Notably, Hampshire’s recent tuition increase falls squarely within that range.

Perhaps instead of focusing on divestment, Hampshire College should focus on its commitment to students, focusing its investing priorities to affordably grant them the educations they so passionately seek. For most endowment funds, energy investments are key components in a diversified mix of assets. The cyclical nature of the energy sector makes the sector more attractive to long-term investors who base decisions on the underlying value of energy resources, rather than the day-to-day motion of commodities markets. Successful energy businesses often operate with this long-term view in mind, paying consistent dividends to shareholders over many years.

Hampshire’s divestment decision was a lucky one in that they divested shortly before the energy sector took a swing downwards as commodities prices fell after a long rise. Divesting now would only mean selling low and losing out on future upticks in the market. And as Dr. Daniel Fischel of the University of Chicago Law School has noted in research on the subject of divestment, “the best guide to the potential effects of diversification… is to examine long-term averages.”

Looking at the long term in energy is certainly the right place to focus one’s attention as an endowment investor. The energy sector isn’t going anywhere; in fact, the International Energy Agency estimated in 2016 that energy consumption will grow 30% by 2040, including a 50% rise in natural gas consumption worldwide.

Hampshire can be happy with its decision to divest, but the next time it raises tuition for students it should ask itself: was it worth it?