This fact sheet provides background and context regarding the endowment and its management.
Wellesley’s discussion of fossil-fuel divestment has raised some challenging issues. Among them are the proper role of the College’s endowment in addressing social issues and the potential cost of using the endowment to pursue social or environmental goals.
On July 1, 2013, the value of Wellesley’s endowment was $1,580 million. The endowment—the product of generous gifts from alumnae and friends of the College and the careful stewardship of those funds—generates roughly 40 percent of Wellesley’s net revenue. The endowment’s purpose is to support the mission of the College by providing sustainable and reliable support to the operating budget today and into the future. Being sustainable is important. Endowed funds allow the College to make commitments that are essentially perpetual, such as hiring a tenured professor. The College’s endowment consists of approximately 3,000 individual funds established for a variety of restricted purposes. These funds were given to the College by donors with the intent that they would be used for specific purposes as designated, and that Wellesley would work to maximize the return on them in order to benefit the institution. For investment purposes, the individual endowment funds are pooled together. Individual endowment funds own units (shares) in the pool, much like a mutual fund.
Management of the Wellesley endowment is the responsibility of the Board of Trustees. The Investment Committee of the Board oversees an Investment Office team of six investment professionals who are responsible for recommending the asset allocation and for hiring investment managers to implement the strategy.
In order to support the operating budget and maintain purchasing power, the endowment needs to earn a return that over time exceeds inflation by approximately 5 percent a year. A variety of strategies are pursued to achieve the target return, but one of the most important is diversification, since not all assets do well all the time or at the same time. Therefore, the endowment is placed in different asset classes such as public equities (both domestic and international), private equity, real estate, bonds, other assets, and cash. In addition, investment managers are selected for the diversity of investment strategies they offer.
The most basic approach to investing is to place the endowment’s resources in an index fund. This approach is called “passive” management and is a good, inexpensive strategy that many of us use in our own individual investment choices. An index fund will hold all the stocks in a specific grouping, the Standard & Poor’s 500 Index for example, and its performance will track the overall performance of all stocks in that group.
Wellesley’s endowment approach is similar to that used by other institutions with large endowments. Using “active” management, the Investment Office does not purchase stocks, bonds, and other assets directly, relying instead on third-party investment managers. Wellesley invests with 75 managers chosen on the basis of the strength of their organizations and ability to outperform the markets in which they operate. By investing with these investment managers, the College is able to access the most talented investors in a particular strategy or asset class. These managers hold our funds in one of two ways: Either they are “separately held” under Wellesley’s name by the firm, or they are “commingled” in a pool of all funds invested by that manager. The majority of Wellesley’s endowment is held in commingled funds. (For more details, see the slide “58 Percent of the Endowment Portfolio Would be Affected by Divestment” in the attached Powerpoint file.)
Wellesley’s investment performance over time has been excellent, with returns consistently in the top third of our peers as tracked by Cambridge Associates, a major investment consulting firm. Over the 10-year period ending on June 30, 2013, a portfolio composed of 65 percent Standard & Poor’s 500 Index Fund and 35 percent Citigroup’s Broad Investment Grade bond index had an annualized return of 6.6 percent. The Wellesley endowment, in contrast, grew by 8.5 percent. In real terms, that 1.9 percent difference means that the endowment grew by an additional $216M over those 10 years using our investment approach rather than passive management. Each of those additional dollars matters in support of the institution.
The Impact of Divestment on Endowment Management
Some of the managers employed by the College have investments in the stocks and bonds of energy companies. On June 30, 2013, 0.5 percent of the endowment ($8M) was in the largest 200 publicly traded fossil fuel companies in separately held accounts. The three firms with these particular investments manage 6 percent of our total endowment. These managers are unwilling to accept a fossil-free mandate and would decline Wellesley’s business—all 6 percent of it rather than just changing the 0.5 percent—if asked to do so. Fossil-free investment alternatives are strategically limiting, and few of the investment firms that pursue them meet the College’s standards for track record and organizational quality. The Investment Office estimates that the cost of reinvesting these assets in fossil-free investments would reduce endowment earnings by $1.6 million a year. (See “The Cost of Divesting Separately Held Investments” in the attached Powerpoint file.)
The Investment Office estimates that the endowment had an additional 1.7 percent exposure ($26M) to these companies through commingled funds representing 58 percent of our portfolio. In making investments on clients’ behalf, Wellesley’s managers consider a wide range of risks, including those posed by climate change. Although some may choose not to invest in fossil fuel companies, none are likely to adopt a fossil-free approach, because restricting investment opportunities is at odds with generating outstanding investment returns. In order to avoid investments in fossil fuel companies altogether, Wellesley would have to reinvest 58 percent of the endowment. The Investment Office estimates that full divestment would reduce endowment earnings, because Wellesley would earn market returns instead of the above market returns that its investment managers have historically generated, and subsequently would reduce endowment spending by $15 million a year, a figure that is in line with estimates made by other colleges with similar investment strategies.
The Impact of Divestment on the Operating Budget
As a result of the reduction in endowment earnings and spending, there would be an impact on the operating budget of the College. As indicated earlier, income from the endowment currently provides 40 percent of Wellesley’s total revenue and is the College’s single largest source of revenue, larger than net tuition, room, and board. While the College’s endowment spending formula is designed to smooth changes over time, the reduction in endowment earnings would mean a reduction in all endowment support in the operating budget of approximately $7.2M within five years, and this loss of funding for the operating budget would continue to grow in subsequent years until the full $15 million reduction in earnings is transmitted through the spend rule to the operating budget. (See “The Cost of Divesting Separately Held and Commingled Holdings” in the attached Powerpoint file.) Endowment support is particularly important to funding financial aid, internships, and faculty salaries.
Over the years, the Board of Trustees has addressed a wide range of social and environmental questions that have arisen in connection with the investment of the endowment. For decades, the College has actively voted the proxies of companies separately held in Wellesley’s name. The Subcommittee on Proxy Voting, a subcommittee of the Investment Committee and composed of trustees, students, and faculty, considers and acts upon corporate and shareholder proposals regarding board diversity, labor practices, environmental issues, and human rights.
In the 1980s, the Board of Trustees did vote to divest from companies whose business practices were deemed to support South Africa’s policy of apartheid. At that time, most of our endowment investments were owned directly by the College, and the Investment Committee made decisions themselves about investment in specific companies. Investment managers were not generally used.
The Investment Committee has also previously considered whether to divest from tobacco stocks or to actively promote greater representation by women on corporate boards. In both cases, the Investment Committee decided against recommending action to the full board.
The endowment is not invested with any investment funds dedicated solely to clean energy and renewable resources, but the College investment managers have made investments in those areas that totaled approximately 3.2 percent (over $50M) as of June 30, 2013. The investment managers will continue to evaluate these investments when both prudent and opportunistic.