Endowment Investments Investigated
Amassing 1.3 billion dollars, Exeter holds one of the largest high school endowments in the world, which provides approximately 55 percent of the Academy’s operating revenue and consists of 1,400 funds granted by donors. According to PEA’s 2016-17 Financial Report, the endowment is invested with the dual goal of supporting Exeter’s current operations and maintaining the endowment for future generations. However, the endowment is invested by financial managers, giving the Investment Committee little control over where the money is invested and leading to concerns surrounding the morality and even hypocrisy of certain investments.
“Exeter invests with managers and not in individual companies or assets.”
According to Director of Investments Justin Merrill, the role of Exeter’s investment staff is to hire and monitor managers that determine where to invest the endowment in order to supply the Academy with steady returns. “Exeter invests with managers and not in individual companies or assets,” he said. “Exeter’s managers invest in a very broad range of markets, companies, geographies and asset types. This helps to diversify the exposures in the endowment to access a wide range of potential return sources.”
Comprised of volunteer alumni, current and former trustees and associate members, each of whom are experienced in investing and finance, the Investment Committee is responsible for selecting these managers.
Head of the Trustees Tony Downer elaborated on this process. He said, “The Investment Committee scours the landscape of investment managers, comes forward with a set of candidate firms, discusses the merits of each and decides what amount of the endowment—if any—to allocate to that investment manager.”
Although the Investment Committee chooses these managers, it has no direct control over where the managers invest the money. “We have no influence or impact on the specific investment decisions that they make,” Downer said. “We rely upon our managers to make those selections and if we are dissatisfied with the investment returns generated by the manager, we withdraw our money from that manager.”
To ensure that the Investment Committee is satisfied with the general condition of investments, managers give regular updates of their portfolios. “We do not always have complete security level or individual asset level visibility for the whole portfolio, but each manager provides various portfolio disclosures on a periodic basis,” Merrill said.
According to Downer, “In terms of countries, we clearly have a heavy concentration of investment in the U.S., with meaningful investments in Europe and Asia. Our investment presence in Latin America, Africa, Australia and Russia would be very limited.” However, Exeter’s 2015-16 fiscal year Form 990, an internal revenue service form for nonprofit organizations like Exeter, states that there is $355,610,847 invested in Central America and the Caribbean, while there is $36,831,118 invested in Europe.
Downer addressed concerns that managers possibly invest in ethically murky markets. “None of our managers have as a strategy a focus on the arms, tobacco or alcohol industries,” Downer said. “Any holdings that they may have would be incidental rather than strategically significant, and we have imperfect visibility at that granular level of detail.”
Another of these controversial markets concerns fossil fuels and unsustainable energy. 95 million dollars of the endowment are invested in fossil fuel entities, a highly-debated issue at PEA, as Exeter advocates for sustainability on campus and in the world. The EXI519 Green Umbrella Learning Lab course, for example, enables students to take environmental action. As stated in the 2018-19 coursebook, the Green Umbrella Learning Lab “affords students passionate about sustainability the opportunity to enact these ‘big changes’ by doing real work in sustainability to help Exeter meet its Sustainability Master Plan and carbon reduction goals.”
Clubs on campus also advocate for divestment from fossil fuels. Divest Exeter, co-headed by uppers Hillary Davis and Sophie Faliero, calls in its mission statement for the “withdrawal of [PEA’s] holding in fossil fuel corporations,” as “it is our responsibility as a leader among global secondary school institutions to endorse sustainability.”
Downer, however, explained the dilemma of divestment. “Given that Exeter selects managers who make those investments for us, are we prepared to part with those managers and face the prospect of lower returns, as they are highly likely to refuse?” he posed. “How do we rationalize our willing consumption of those products as individuals and as an institution and condemn them as shareholders?”
Downer also pointed out that the endowment could possibly not sustain its affordability if Exeter were to divest. As written in the 2016-2017 financial report, “the single largest use of endowment revenue—35 percent—is for financial aid, which supports student grants for tuition, room and board”—something that could be jeopardized if Exeter completely divested, according to Downer.
Senior Alice Little discussed these very issues in her social ethics class. “I say we should divest because we’re investing in energy sources such as oil and non-renewable energy that aren’t safe for the environment,” she said. “But there’s also a flip side to it that many don’t consider: the school’s operating budget is huge, and the amount of money we put out every year needs to be supplemented by the assets allocated from the endowment.”
In Little’s opinion, divesting and financial aid aren’t mutually exclusive. “The school would take a financial hit from divesting, but it’s the morally correct thing to do,” she said. “But financial aid shouldn’t suffer from that. There are other places we could budget.”
Faliero agreed, saying, “Initially investing in renewable energy is going to be more of an investment than we have currently in fossil fuels, but we will see financial profit over the course of five, ten years,” she said. “It would eventually boost our endowment, providing more for financial aid students.”
However, Downer challenged the difference between morally questionable markets and their impactson Exeter student life. “Because so many critical aspects of the Exeter experience—student financial aid, faculty compensation, the maintenance of our facilities, etc.—depend so heavily on the endowment for their funding, we purposely invest the endowment to produce attractive returns without exposing the endowment to the full extent of the market’s risk,” he said.
He also noted the dangers of aligning to a certain political agenda by determining whether a certain market is morally correct. “Fossil fuels are critical for the elevation from poverty for many throughout the world. Is it right to condemn them?” he continued. “Should we politicize our endowment, and if we do, where do you draw the line, as people have very strong views on opiates, on weapons, on tobacco and on profit prisons?”
Downer also explained that many funds invest solely on the principle of returns—not political principles. “We have multiple investments with a general partner who runs funds investment in wind farms,” he said. “That same partner also invests in natural gas opportunities; the world does not always run along clear lines.”