Political activists set their sights on Michigan State University last fall.
Their objective: Push the school and a handful of other institutional investors to divest from a Renaissance Technologies LLC fund. The reason: The firm’s then co-chief executive officer, Robert Mercer, provided funding to “several white supremacist organizations like Breitbart,” according to an online petition.
The pressure was more intense than usual but still … manageable. MSU Chief Investment Officer Philip Zecher says he received a few dozen emails urging the $2.7 billion endowment to pull its $50 million investment from the quantitative fund. Students, alumni, and others posted on social media and started a petition at Change.org.
On Nov. 2, Mercer announced he would step down from his leadership role at Renaissance, saying in a letter to staff that he considered discrimination on the basis of race to be “abhorrent.” Less than two weeks after the campaign began, the push at MSU abruptly stopped.
Resolving divestment campaigns isn’t always going to be as easy. Calls continue for colleges to divest from fossil fuels and for pension funds to sell out of gun-related investments. After three members of the California State Teachers’ Retirement System were killed in the Las Vegas mass shooting in October, the state’s treasurer called for the pension system to divest from retailers and wholesalers that sell firearms and accessories such as bump stocks. And following the shooting at Marjory Stoneman Douglas High School that killed 17 in February, some Florida teachers were surprised to learn that their state retirement funds are invested in firearms makers. It’s only a matter of time before institutions will be asked to drop investments over other matters, such as opioids or debt in Puerto Rico.
Anticipating that he would face other divestment campaigns, MSU’s Zecher started in December to articulate criteria for handling them. Before recommending that the school strip an investment from the portfolio, Zecher would consider four tests. First, a campaign must have a clear and defined target. Second, it needs broad-based agreement across the school community on the moral imperative to divest. Third, there must be a case for taking action, which could affect performance, to achieve the desired outcome. Fourth, it should be clear that not being invested is better than not having a voice. That criterion follows how BlackRock Inc. is engaging the companies it invests in to become more socially responsible. “If we have a voice at the table, we need to make sure we’re acting in a socially responsible way as corporate owners,” Zecher says. “I’m looking at ways the university can better do that going forward, such as how do we vote proxies.’’
Income from MSU’s endowment, Zecher notes, provides critical support for many students. “If divesting could impact that support, we need to set a high bar,” he says. Zecher, 50, who earned a doctorate in nuclear physics at MSU, started as the school’s first CIO in December 2015.
(Michigan State, meanwhile, has itself faced upheaval after a physician affiliated with the school, Larry Nassar, was sentenced to prison for abusing young female athletes, including members of the U.S. Olympic gymnastics team. MSU’s president stepped down in February.)
The problem with divestment, of course, is that it can work against the main purpose of pensions and endowments: making money.
Harvard’s $37 billion endowment, the richest in higher education, is often asked to shed certain investments. The school’s outgoing president, Drew Faust, has described the endowment as a resource, “not an instrument to impel social or political change.” The head of Stanford’s $27 billion endowment in March also said the school doesn’t use its fund to achieve social outcomes.
And the risk of losing money is real. The California Public Employees’ Retirement System rarely divests unless mandated to by the state legislature. In 2000, though, the pension fund voted to divest from tobacco for internally managed portfolios and use tobacco-free benchmarks for public equity and debt holdings. The pension system also required outside managers to accept tobacco-free benchmarks.
Those moves turned out to be costly. They reduced portfolio returns by as much as $3 billion from 2001 to 2014, according to an analysis from Wilshire Associates Inc., the fund’s consultant. Tobacco stocks pay high dividends, and they’ve continued to perform well, says Vivien Azer, an analyst with Cowen & Co. who follows the industry. “You have a large consumer base, and it’s very hard to quit smoking,” she says. “They are willing to pay higher prices, and those higher prices drive profit growth.” In 2016, CalPERS expanded the prohibition to outside managers, removing their discretion to make out-of-benchmark tobacco-related purchases.
MSU has a bit of history with divestment. To protest apartheid, trustees voted in 1978 to get rid of investments in companies that did business in South Africa, becoming the first large U.S. university to do so. Over the next few years, the school sold about $7 million of holdings in about a dozen stocks, including IBM, Exxon, Xerox, and Michigan-based Ford, Dow Chemical, and General Motors, according to archives of Michigan State and the American Committee on Africa. The divested stocks made up more than 20 percent of the endowment. MSU’s high concentration in U.S. equities at the time was typical of the way endowments invested then. Today, portfolios are more complicated.
The largest endowments nowadays often have half their assets in alternatives such as hedge funds and private equity. As limited partners, they typically don’t control what companies the funds buy. What’s more, money can be locked up for years—adding another complication to divestment efforts.
A handful of smaller college funds has moved to shed investments related to fossil fuels.
Barnard College in New York, with $327 million in assets, has agreed to divest from companies that thwart efforts to address the effects of climate change. “We can’t move the market because we’re small,” says Robert Goldberg, Barnard’s chief operating officer. “But if other institutions like us are attracted to this approach, it begins to build a coalition where companies will have to pay attention.”
Lewis & Clark College in Portland, Ore., with $231 million, plans to sell investments that contribute to global warming. Lewis & Clark won’t purchase any new securities with fossil fuel exposure, because of the fiduciary responsibility, not because it’s a social issue, says CIO Carl Vance, who oversees the endowment. “There is a $100 trillion carbon bubble,” he says. “By selling these assets now, we won’t have that exposure when the reckoning time arrives.” For both Barnard and Lewis & Clark, private equity investments will remain until the funds are cashed out, which could take a decade.
Still, endowments have largely resisted the pressure to divest from energy. Almost three dozen endowments invest in funds run by EnCap Investments LP, according to data compiled by Bloomberg. The private equity firm has holdings in oil and gas and energy infrastructure that in some funds have produced returns as high as 50 percent, according to Bloomberg data.
Demand is so high that some endowments can’t get into Houston-based EnCap or want bigger pieces. St. Olaf College, Old Dominion University, and the University of California system have put money in multiple funds, according to Bloomberg data. So has Pomona College, one of the richest liberal arts schools in the U.S. with an endowment of $2.2 billion for its almost 1,700 students.
Pomona, outside of Los Angeles, invested in at least two EnCap funds, according to its public tax filings. Students at Pomona asked the administration to divest from fossil fuel companies in 2013, in response to the threats that global warming poses. The school declined, citing data from its investment consultant that showed its endowment could decrease by almost $500 million over a decade. “The loss of growth in the total endowment, caused mainly by the need to withdraw from the best actively managed commingled funds, would result in an estimated $6.6 million loss in annual spendable income for such things as financial aid, faculty and staff salaries, and program support,” according to a school letter announcing the decision.
Wellesley College also found that divestment isn’t a good option for its $2 billion endowment. After a push for divestment from students, school administrators said they didn’t support using the endowment as a lever for social change. “Although the economic impact on fossil fuel companies would be inconsequential, the potential cost of divesting from all fossil fuel holdings, directly and indirectly held, could be so high that it would seriously compromise Wellesley’s ability to serve its educational mission,” the Massachusetts-based school said in a statement.
For Michigan State’s part, the risk of underperforming because of divestment isn’t something to take lightly, Zecher says. The Renaissance Institutional Equity Fund is one of the lowest-fee investments in the school’s portfolio and a good performer. Dropping it would have met only one of Zecher’s criteria—a defined target—he says.
Apartheid, four decades ago, was different. It would have satisfied all four tests Zecher set out, had his criteria existed then. “We’re being consistent with our past behavior,” he says.
Lorin covers college endowments at Bloomberg News in New York.