Archive for the ‘NEWS AND COMMENTARY’ Category

Endowments and Donors Can’t Save Higher Ed

08 / 24 / 2020
by Charles Skorina | Comments are closed

American colleges, cultural institutions, and health systems are in deep trouble.

Tuition, room and board revenue, government aid, donor gifts, visitor and patient revenue have all collapsed.

Staff and pay cuts have hit many of the well-known institutions we work with and more are in the works.

College campuses are hard hit

Terry Hartle, senior vice president at the American Council on Education, estimated in a recent PBS interview that colleges and universities have taken an aggregate twenty percent hit to their budgets so far in 2020.

Most schools think 2021 will be much worse.

The late Harvard professor Clayton M. Christensen (The Innovator’s Dilemma) predicted a few years ago that half of America’s 4000 colleges and universities would go bankrupt in the next decade or two, as online education “disrupts” the business models of traditional institutions and runs them out of business.

With the accelerated shift to on-line learning thanks to the Covid-19 crisis, parents and students are up in arms against the price of a college education.  Mr. Hartle cites $8 billion in refunds this spring just for room and board cancellations.

The cost crisis in higher education has been fermenting for years as states cut education budgets and colleges jacked up tuition and fees.

Scott Galloway, professor of marketing at NYU, points out that tuition has jumped two-and-a-half times in twenty years while the educational “product” has essentially stayed the same.

But the reckoning was delayed by waves of full-fee foreigners and full-recourse student loans.

As students grow accustomed to remote coursework, one wonders how many families will be willing to pay forty thousand and more per year for an off-site experience indistinguishable from every other.

Endowments and donors can only do so much

Our system of higher education – including the great private universities and the endowments that support them – is a key asset in our national preeminence.

Endowment capital has been a bedrock source of support for generations of students and faculty, but it takes a long time to accumulate and it’s very tempting to plunder.

Cambridge, the wealthiest university in Europe, took over 800 years to amass an endowment of $9.3 billion. Harvard's $41 billion took 382 years to accrue. Upstart Stanford University grew its endowment to $27.7.4 billion in "just" 135 years.

And that "hoarded" wealth drove performance; American universities dominate the rankings of global higher education.

Denuding a university's long-term legacy to plug short-term budgetary holes may be politically expedient but it merely postpones the inevitable plunge off the fiscal cliff.

Time to cut the fat

Voluntary support from alumni, foundations, corporations, and religious groups have helped our higher-education system grow at an unparalleled rate while achieving remarkable diversity and unquestioned world leadership.

But donors, endowments, and flush foreigners can’t save higher education from the inescapable abyss without fundamental changes in costs and delivery.

Re-engineering and re-pricing the college experience at a level families can afford is daunting but essential if we wish to maintain the level of excellence we’ve enjoyed since our nation's beginning.

University alumni and endowment staffs have stepped up time and again to support their schools when the going got rough.

It’s time for our universities and colleges administrators to do the same.



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The OCIO Dilemma: Buy, Sell, or Merge

05 / 21 / 2020
by Charles Skorina | Comments are closed

Active management is feeling more love these days.  With the surge in institutions looking for investment help, there is new-found affection for the experience, judgement, and human touch provided by outsourced CIO firms.

But with opportunity pounding on the door, why do so few OCIOs hunger for growth?  Where's that entrepreneurial drive, that vision, passion, and focus on becoming the biggest and the best?

We have been tracking the industry for decades and have yet to see a single independent OCIO provider break through the one-hundred billion AUM level.  Not one.  Most will never reach twenty billion.

The OCIO business, as defined by Commonfund is...the practice of delegating a significant portion of the investment office function to a third-party provider, typically an investment management or consulting firm.

The industry, with $2.38 trillion in assets as of our latest report, is bifurcated, highly diverse, intensely competitive, and the largest six providers on our annual OCIO list - Aon, Blackrock, Goldman Sachs, Mercer, Russell and Willis Towers Watson - with their size and resources dominate the largest segment, corporate pensions.

In this segment, reality bites.  There are only about three-hundred remaining internally managed corporate pensions over a billion AUM and those that outsource will chose one of the big six mentioned above or a major insurance company.  Boutique OCIOs have no chance for the business.

Most new prospects dwell in the sub-$1 billion realm - endowments, foundations, health systems, charities, and associations - and smaller sub-$200 million customers including ultra-high-net-worth families and nonprofits.

The good news is that there are about fifteen hundred colleges and universities in the US (about one-hundred-fifty endowments over $1 billion and another one-hundred-fifty in the $500 million to $1 billion bracket) and several thousand foundations, health systems, charities, and associations.

The bad news is that most of the eighty-three firms on our list compete in this space along-side RIAs, brokers, and advisors.  Literally hundreds of rivals.

Most of these competitors would be better off buying, selling, or merging with other providers instead of grinding away with little gain.

Here's why.



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All-Weather Investment Leaders: We Need Them Now!

02 / 10 / 2020
by Charles Skorina | Comments are closed

We've had a remarkable run in the institutional asset-management biz.  Good enough to camouflage a lot of mismanagement and sub-optimal decisions.

But we all know that there is trouble ahead and that sooner or later there's going to be a reckoning.

When things fall apart again, will your foundation or family office be managed by experienced, agile leaders who can cope?  Will they keep cool heads when others are losing theirs?

A few years ago an endowment CIO told me: “The board hired us [investment staff] after the 2008 crash because they realized that they never fully understood what they had in their portfolio and there was no one on the inside who could expose and explain the risks.”

“The consultants at the time met with the board once a quarter and kept telling the trustees that everything was fine until our portfolio fell off a cliff.”

The Reckoning

Are there new bubbles about to burst?  Here are two possibilities; the unprecedented growth in index vehicles, and the stampede into private equity funds.

The Wall Street Journal reported late last year that the value of US index equity funds had just surpassed US actively managed funds by $4.27 trillion to $4.25 trillion.  The Investment Company Institute disputes the Morningstar data, but the growth and appeal of indexing is undeniable.

Who can resist the allure of cheap and easy index funds and ETFs?  From 2009 to 2019 the S&P returned a beguiling 11.27 percent annualized, excluding dividend reinvest, and indexers could do no wrong.

Unfortunately, bull markets breed short memories.  Few recall that in the prior decade from 1998 to 2009, the S&P actually lost money, delivering a negative 2.72 percent.  (Falling a calamitous 55 percent in the final two years, September 2007 to March 2009.)

As for private equity, PitchBook Data calculates that over the last ten years more than three trillion dollars has flowed into private equity and venture capital funds worldwide.

This despite the fact that since 2005, the returns from these illiquid funds have been little better than liquid public market performance.

Some of the best investors in the business have taken notice and are preparing for the possibility of a collapse.



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A Family Office Home Companion

11 / 21 / 2018
by Charles Skorina | Comments are closed

Honey, We're Rich!

Say what, dear reader?  You have just been blessed with a humongous liquidity event?

After decades of work and a bit of luck you "suddenly" have millions, perhaps even tens or hundreds of millions of dollars in investible wealth after selling your business or going public.

You are now officially rich, and it feels great.

But wait.  What's that?  Obscure family members you never knew existed are beseeching you for "loans"; allegedly good causes from Missoula to Mozambique are demanding donations; sketchy financial "advisors" are bombing your email and phones with "once-in-a-lifetime opportunities."

First Things First

We've recruited family office investment heads and advised on selecting wealth-management firms.  But it works both ways.  We listen very carefully to our clients and learn a lot from them.

Here is some advice from clients who have been through it.

  1. The very first thing. Hire a tough, experienced lawyer who is used to dealing with wealth managers, brokers, and solicitors.  (Not just the firm who helped you with routine legal chores on the way up.)  It will be money well spent and you won't regret it.  You will need a real pro to run interference for you against the sharks.
  2. The very next thing. Hire a reliable and reputable accountant who understands the complexities of wealth-management.  You will need financial controls and a voice of caution.  Dollars can slip away fast without an experienced check on your newly-rich exuberance.
  3. Take your time. No sudden moves.  Think about how to organize your affairs, your objectives, impact on family-members and upcoming generations.
  4. Establish a realistic spending rate. And stick to it.  One rashly-purchased yacht, jet, or hobby-ranch can punch a surprisingly big hole in your seemingly-unsinkable new fortune.

Fortune and Fate



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Cambridge Elevates Recently Appointed President to CEO

05 / 14 / 2016
by Charles Skorina | Comments are closed


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