Is there anything UF could do to raise funds for higher education in Florida during this tough-budget environment? The go-to answers are to raise tuition, raise new taxes or get some rich people to donate money, but there is an answer that might not be as obvious: Use the fees charged to UF's endowment fund.
For those of you who couldn't care less about investing, our university uses a part of its $1.3 billion (as of June 30) endowment that it uses to fund activities and scholarships that couldn't reasonably come from public funds or tuition dollars.
Prior to 1960, many colleges invested money in bonds for the stability of their money as well as modest incomes. Gradually, higher educational institutions moved toward investing their funds in stocks of public corporations. However, it was the practices of the Ivy League schools that changed how universities managed their donations from alumni and others.
In 1985, David Swenson began his tenure as the chief investment officer for Yale and he moved the institution's money heavily into hedge funds, private equity, private real estate deals and other alternative investments. All of these types of investments were not widely used and most of the public had not heard of hedge funds. He was enormously successful in his decision and all the other Ivy League schools followed. After a period of time in the early 2000s, many universities, UF included, moved a big chunk of their money toward these high-risk, high-fee investments.
As of its most recent report from June 30, UF has close to 60 percent of its endowment money in things besides stocks and bonds. Many experts feel that bonds are going to return nothing after inflation for the next decade. All you have to do is look at the interest you get paid on your savings account to see that.
Because of low interest rates, some feel that the only way universities like UF can spend the way UF has is to take more risks with its endowment. The problem is that all these fancy investments carry very high fees. UFICO, which manages the endowment, takes a 1.3 percent cut annually. After that, some of the investors the endowment gives money to charge 2 percent flat fees on top of 20 percent of all positive returns. It is probably a conservative estimate to guess that we spend away 3 to 4 percent of our total endowment money each year on fees alone. This comes to somewhere between $39 million to $51 million in fees.
UFICO does not release information on how much it pays in fees, so there is no way of knowing what the true cost of its investment strategy is. Its argument would probably be that the only way to generate large returns for the future is to invest like it has, but the endowment's mediocre five-year performance of 5.4 percent could have been beaten for a cost of less than 0.10 percent of the endowment, or $1.3 million total, with a simple portfolio of 50 percent U.S. stocks and 50 percent U.S. bonds in simple index funds.
Now that everyone is using alternative investments, their long-term effectiveness must look a lot more like the broad stock market, except this stuff has to outperform by at least 2 percent per year just to stay even after fees! Our endowment supposedly has done very well recently; after all, it received a reward from the hedge fund industry in New York City.
I'd probably give them an award too, if they gave me so many millions. UF would be better served with a simple low-cost passive investment strategy that shuns the self-interested advice of Wall Street.
Travis Hornsby is a statistics and economics senior at UF. His column appears on Mondays.
