Tufts President Calls For Less Risky Investments

In light of the investment losses suffered by the nation’s wealthiest universities this past year, schools with large endowments should adopt more conservative investment strategies, Tufts University President Lawrence S. Bacow said in an interview with Bloomberg News last week.

“It may be the case that the wealthier institutions among us should be taking less risk—not more risk—because they’re less able to manage the volatility in their investment returns given their dependence upon those returns in their operating budgets,” said Bacow, a graduate of Harvard Law School and the Kennedy School, in the interview.

Harvard’s endowment—which funded 38 percent of the University’s operating budget in 2009—fell from $37 billion to $26 billion this past year. Harvard and its peer institutions have been criticized for their investment strategies, which rely heavily on hedge funds, private equity firms, and illiquid assets.

According to Bloomberg, the value of Tufts’ endowment fell by 25 percent this past fiscal year, from roughly $1.5 billion to $1.1 billion, after accounting for gifts and payout. Bacow suggested in the article that Tufts would avoid putting money in hedge funds, which he compared to “black boxes,” requiring investors to relinquish control of assets and put their trust in external managers.

Tufts Director of Public Relations Kim M. Thurler said that Bacow’s remarks were based on the performance of the Tufts’ endowment and were not directed at any other particular University.

While Harvard has acknowledged in recent months that its aggressive investment strategies may have constrained the University’s cash flexibility, it has defended the long-term viability of its approach. Harvard Treasurer James F. Rothenberg noted in an interview with the Harvard Gazette last month that the University’s investment strategies generated an average annual return of 8.9 percent over the past 10 years, including last year’s financial crisis—far exceeding the annualized 1.5 percent return that would have been generated by a “plain vanilla” portfolio of stocks and bonds.

“Certainly our endowment investment model was successful for quite some time,” Rothenberg said to the Gazette. “But I think, yes, there are some changes already under way to increase flexibility, reduce leverage, and better position [Harvard’s] portfolio for the future.”

Harvard spokesman Kevin Galvin declined to comment on Bacow’s remarks.

Harvard Business School professor and Nobel Laureate Robert C. Merton said that some risk is necessary to ensure that the University can make a large enough return on its investments to support its operating budget. He said that he had not previously heard Bacow’s comments but added that “the right strategy for the endowment of any institution cannot be found in the abstract.”