The Heartland Institute and Bloomberg recently reported that the managers of Harvard’s endowment lost a whopping $1 billion by prioritizing “feel good” investments over ones that consistently generate solid returns. These losses, along with the stunning $8.5 billion losses that CalPERS faced after pursuing a divestment strategy, fly in the face of activist claims that ideology-based investing is as profitable as traditional investment strategies.
While the losses are significant there is a greater issue at stake here: the question of whether fund managers are violating their fiduciary duty by making politically-motivated investment decisions, instead of focusing solely on maximizing returns. Many experts believe they have. For example, the U.S. Department of Labor, which oversees retirement plan funds, released new guidelines at the end of April that stated:
“…because every investment necessarily causes a plan to forego other investment opportunities, plan fiduciaries are not permitted to sacrifice investment return or take on additional investment risk as a means of using plan investments to promote collateral social policy goals.”
And as energy expert Paul Driessen of the Heartland Institute put it:
“It seems to me the money managers followed their own agendas while violating their fiduciary responsibilities to the university they were supposed to serve…The bottom line is Harvard had a fiduciary responsibility to invest wisely and earn money for the school instead of losing a billion dollars in pursuit of politically fashionable, green pursuits.”
Even though Harvard is not remotely short on cash, it’s endowment’s recent performance has been deeply troubling compared to its peers. In fact, according to Bloomberg, its 10-year average annual return is just 4.4% compared to 6.6% at Yale, 7.1% at Princeton, 7.3% at Columbia and 7.6% at MIT.
Harvard’s administrators recognized pretty quickly that fossil fuel divestment was a terrible policy, and chose to protect students and faculty from the inevitable cost of divesting the endowment. In the words of former Harvard President Drew Faust:
“I don’t think that divestment is an appropriate tool, because I don’t think the endowment should be used for exerting political pressure. It is meant to fund the wide range of activities that the University undertakes. As we said before, 35 percent of our operating budget comes from the endowment. That is why people gave their funds to create the endowment. It should not be used as a weapon to exert pressure on one group or another.”
Let’s hope this Harvard recommits to emphasizing returns, not spurious political gestures, with their endowment and remembers that appeasing emotional pleas may, ultimately, cost them big bucks.