By Michael McDonald
(Bloomberg) --A group of Harvard alumni proposed a solution for how the university’s endowment can pay for a new tax on investment income and boost returns: don’t think so much.
Harvard should use the savings from shifting half of its $37.1 billion endowment into low-cost funds tracking the S&P 500 to cover the cost of a new tax that some of the wealthiest schools will face, the group said Thursday in a letter to incoming President Lawrence Bacow.
The 11 alumni from the Class of 1969, who have criticized compensation at the endowment, said the S&P 500 has produced better returns than Harvard for a decade. The group includes historian David Kaiser; Barbara Foley, an English professor at Rutgers University in Newark, New Jersey; and Paula Caplan, an associate at Harvard’s Dubois Research Institute.
Harvard’s endowment would have grown more rapidly if the entire portfolio was invested in the S&P 500, reaching more than $90 billion last year, excluding any expenses incurred by the fund, the group said.
In fiscal 2017, the fund gained 8.1 percent, lagging behind peers. It gained an annualized 4.4 percent in the past 10 years through June 30, trailing the S&P benchmark’s 7.2 percent.
“Our proposal reflects Warren Buffett’s widely publicized argument that wealthy individuals and institutions would have been much better advised, beginning in 2008, to have put their money in the S&P 500 index than to entrust it to hedge fund managers,” the alumni wrote.
Harvard estimated that the new 1.4 percent tax would have cost the endowment $43 million last year. Drew Faust, who’s stepping down as university president in June, has warned that the tax hit may erode support for financial aid and academic research.
A spokesman for Harvard had no immediate comment. A spokesman for Harvard Management Co., which oversees the endowment, didn’t reply to a request for comment.
Harvard Management, which hired N.P. ‘Narv’ Narvekar as chief executive officer just over a year ago, has reduced its staff, sold assets and is hiring outside money managers in order to reverse a decade of poor performance.
David Swensen, chief investment officer of Yale University’s endowment, defended the school’s use of outside managers in its annual report last April. A passive strategy would have resulted in dramatically lower net returns over the past 30 years, diminishing the endowment’s ability to support the University, he wrote.
The Harvard alumni group said removing the entire endowment from hedge funds “would be a very radical change” and suggested removing just half, “at least for the time being.”
Harvard and other universities already use passive strategies as part of their portfolio management, though the bulk of their endowments tend to invest with active managers, including hedge funds, which are known for higher fees. Last year, Harvard said in a filing that it held more than $1 billion of low-cost exchange-traded funds.
“We propose a radical new endowment strategy to enable the university to avoid such cuts, while putting the whole management of the endowment on a new basis that would better reflect the values of a great university,” the alumni wrote.
--With assistance from Janet Lorin.To contact the reporter on this story: Michael McDonald in Boston at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] Mary Romano, Peter Eichenbaum