Friday, May 17, 2013

Isabella without Columbus

Inside Higher Education had a story this morning about Swarthmore College, a selective liberal arts college in Pennsylvania, that is considering whether to divest from its endowment companies that produce fossil fuels (coal, oil and gas). Part of this comes from the activities of one Bill McKibben - pictured at the left - who seems to think this would be a good idea.  (After all, it is not his money.)  McKibben, like all good ideologues, has established a blacklist which demands that these companies cease their exploration for new fossil fuels.  (It is not clear whether he has also demanded that we go back to a flat earth policy.)

When this story began last year one Swarthmore senior commented in a New York Times story - “We’ve reached this point of intense urgency that we need to act on climate change now, but the situation is bleaker than it’s ever been from a political perspective,” said William Lawrence, a Swarthmore senior from East Lansing, Mich.   There have been a couple of colleges with tiny endowments that have made the step but were Swarthmore to make join them it would slightly more important.   No one out of East Podunk Maine has heard of Unity College and while many have heard of Hampshire - it is out there on the fringes.

But were Swarthmore to make this step it would be significant.  Harvard's undergraduates have

requested the Harvard Board to do it.  So far Harvard's board has declined but what the request actually represents, besides economic insanity, is a real cost.   About 10% of the Russel 3000 involves companies that would be on the no-no list.  So the Swarthmore trustees decided to do an analysis of whether this bright idea made any sense.  Not a bad idea when your endowment really counts.

The IHE story details the potential costs.  For students at Swarthmore it would produce a couple of hundred million dollars in foregone revenue.  That could amount to an increase in tuition of about $13,000.   Swarthmore, like many other endowments (theirs is currently $1.5 billion) uses index funds to improve investing efficiency.   The paper estimates that up to 60% of the funds they use could be affected by this policy.   The five and ten year returns to Swarthmore have been pretty good - for the 10 year benchmark returns have exceeded averages by a bit less than 2% per year.

As the Swarthmore trustee paper suggests, managing an endowment over time is a complex set of tasks.  Fortunately, anyone with a bit of sense would look that this proposal and reject it immediately.

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