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May 4, 2015

Trillium’s ‘Analysis’ of Harvard’s Investments Is a Classic Case of Divestment Activism

Last week, Boston Magazine posted an item on its blog about a “new analysis” that allegedly “blows to bits” the idea that investing in companies that produce oil and gas is a good idea. The source of this new and provocative analysis? An asset management firm specializing in what it refers to as “green investing,” which includes funds that Trillium insists are entirely devoid of fossil-fuel related firms.

Normally, we’d provide a link to a paper like that, and then spend a few minutes working through some of the more obvious methodological errors, bad inputs and dumb assumptions that end up informing the paper’s core conclusions. But, in this case, there’s no paper to link to. Nope: just a blog post from the Trillium CEO Matthew Patsky asking folks to take him at his word, suspend any nagging curiosity they may have regarding how he produced the numbers he cites, and accept it as fact that, in this case, Harvard Univ.’s endowment would be better off if it dropped energy-stocks altogether, and went with so-called “green” investing instead (Mr. Patsky also likely has a few ideas about a specific firm that could be hired to help Harvard do that).

Of course, this isn’t the first time Trillium has waded into the divestment issue. In fact, the firm has been fairly wide open about its pro-divestment position, even working directly with activist group 350.org on a white paper last year providing investors with a roadmap on how to divest from energy firms (why a “how-to” guide on how to sell a stock needs to be 28-pages long, we can’t say).  Trillium and 350.org have also collaborated on actual, boots-on-the-ground campaigning efforts. In fact, two weeks ago, 350.org chairman Bill McKibben and Trillium’s Matthew Patsky sat on a “panel of experts” at a carbon risk forum in Vermont, organized by 350 Vermont and the Sierra Club to put pressure on the state to divest its pension funds of energy stocks.

For Trillium, the partnership with 350.org makes perfect business sense, essentially using the 350.org folks as outsourced salesmen for the various funds and products that Trillium hocks to investors. But Trillium has a role to play in this scheme as well, one specifically focused on doing whatever it can to attack the conventional (and, in this case, correct) wisdom that suggests excluding a major sector of the economy (like energy) as a candidate for investment will do significant damage to one’s portfolio.

By now, of course, everyone’s aware of the analysis from Prof. Fischel of the Univ. of Chicago Law School that projects an annual loss of as much as 70 basis points for those portfolios that exclude fossil-related securities. As Fischel has pointed out several times, though, it’s not just that energy stocks have performed well over time relative to other sectors (though that is in fact true), it’s that the energy sector is highly “un”correlated with other major sectors of the economy. In other words: when the rest of the economy is bad, energy stocks, historically, have done better – providing investors the well-established benefits of diversification and protecting them from volatile swings in the marketplace.

All of which is to say: when it comes to trying to convince rational people that divestment is somehow a good thing from a financial standpoint, Trillium has its work cut out for itself. But at least they’re giving it the old college try, right? Turns out, the so-called analysis that Boston Magazine hails on its blog as “blow[ing] to bits” 100-or-so years of sound investment advice is actually just a quick-and-dirty, back-of-the-envelope, pencil-on-a-napkin assessment of what the current stock prices are for a handful of energy and mining firms that, SEC records show, were either previously or currently held by Harvard’s endowment management company.

Here’s the critical paragraph in the Patsky blog post, which, at least to some extent, reveals the “methodology” Patsky used to compile his “analysis”:

“Specifically, Harvard’s SEC filings display seven companies that students have called for divestment from, based on the Carbon Underground 200 list. These are Anadarko Petroleum, Chesapeake Energy, CNOOC, Pioneer Natural Resources, Petrobras, Range Resources and Vale. Six of these seven companies produced losses for Harvard over the past 3 years. Gains and losses were calculated using each positions quarterly starting value and its subsequent return.”

Of course, the 13F form that Harvard files with SEC each quarter only discloses some of the purchases (and dispositions) of stock the school made during that quarter, and only for stocks tied to companies that list on U.S. exchanges. In fact, all Trillium really did here was pull out the fossil-related stocks that Harvard said it purchased, collect information on how many shares were purchased, and then compared the price of those stocks in 2012 to the price as of March 2015.

Let’s just say you don’t need to be Bill Ackman to understand the problems with this methodology. For starters, Trillium assumes that Harvard held on to all of these stocks for the entire three-year period, even though the school obviously bought, sold, re-bought and re-sold several of these securities during that time, at different prices. Second, the equities that Harvard reports on its 13F form represent just three percent of its endowment, meaning that the university also “owns” oil and gas-related securities through mutual funds and other mechanisms. None of these appear on the 13F form, so Trillium does not have access to any of that important data.

Third, Patsky’s blog fails to mention why the stock prices of those oil and gas companies happened to be low during the time period he just randomly (!) decided to study, which was characterized by an absolute free-fall in the price of the underlying commodity that oil and firms produce and sell. Patsky acknowledges that the vast majority of losses he says Harvard’s endowment has sustained owing to its energy investments took place over the past six months, ending March 31, 2015. Funny: that just happens to be the period that corresponds with the most dramatic declines in the price of oil.

How did these oil prices get so low? Lots of ways to answer that, but, obviously, the industry’s ability to apply cutting-edge technology to produce more oil and more gas than was previously thought possible certainly is an important factor. “Green” investment firms like Trillium argue oil and gas is a bad investment, because governments will someday come together to pass global policies preventing companies from accessing their reserves in the ground. Here, though, they appear to be arguing that oil and gas is a bad investment, because oil and gas firms are too good at producing energy, and have thus created a supply imbalance that has is having a deleterious impact on their stock prices. So, which is it again? Are oil and gas firms bad investments because there’s going to be too much supply in the future, or not enough?

It also turns out that even while Trillium supports the divestment movement on the basis of the argument that engagement with oil and gas companies “doesn’t work,” the firm itself invests in oil and gas companies for the purpose of allowing them to file proxy resolutions aimed at promoting activism – in other words, “to engage.” In fact, Trillium makes no effort to hide the fact that it “filed the very first shareholder proposal on the Alberta Oil Sands” to push for ConocoPhillips to improve environmental impact disclosures.

If we look to the facts, it turns out that divesting from fossil fuels could significantly damage Harvard’s endowment. As President Drew Faust stated in 2013, “We should … be clear-sighted about the risks that divestment could pose to the endowment’s capacity to propel our important research and teaching mission.” And, as mentioned, a study by former University of Chicago law school dean Prof. Daniel Fischel concludes that divesting from fossil fuel stocks would decrease portfolio performance by 70 basis points on the total $456 billion in American university endowment assets—a decrease in annual growth by almost $3.2 billion annually. It’s no surprise that peer institutions like Columbia University, Cornell University, and Brown University have also chosen not to divest, given what’s at stake.

It’s pretty clear that Trillium’s analysis is a classic case of pro-divestment activism, rather than a methodologically sound report produced by a legitimate financial advisor.