Julia Knoerr ‘21
For many students, college finances appear convoluted and do not frequently enter daily concerns. Consequently, misconceptions often arise about differences in the college’s endowment and investments versus its budget and spending.
To better understand Davidson’s investment process, The Davidsonian sat down with Ray Jacobson, Chief Investment Officer, and Chris Barrera, Investment Operations Manager. Davidson is currently in the process of hiring a new Chief Financial Officer.
Davidson’s operating budget consists primarily of revenues from tuition and fees, endowment income, and gifts and trusts. These revenues support compensation, financial aid, and other operating expenses. However, the college’s budget and spending are distinct from its endowment and investments.
Jacobson explained the relationship between the endowment and investments: “The endowment consists of past gifts and investment appreciation. It grows when investment returns are positive. This goes into perhaps a misperception—no tuition dollars go into the endowment.”
Gifts are often directed towards a specific purpose, but endowment funds only go towards Davidson College and its constituents.
In a statement emailed to The Davidsonian, President Carol Quillen added, “The endowment provides critical funding that supports scholarships and faculty positions and helps sustain day-to-day operations of the college… The endowment has been quite successful. Our returns have been above average compared to other schools, while our risk has been below average.”
A feature in the Fall 2017 Davidson Journal noted that Davidson’s endowment “ranks 18th in size among the college’s official peer set of 21 schools.” How can Davidson meet 100% of calculated financial need with an endowment significantly smaller than that of many other institutions?
Jacobson emphasized, “One reason [we can commit to meeting 100% of calculated financial need] is we have exceptional annual fundraising efforts. Two, there has been and continues to be a strong effort in raising endowed scholarship funds. Comparatively, some schools are not purely need-blind, and some schools are also not meeting 100% of calculated financial need.”
As of June 30, 2018, the endowment totaled $822 million. Asset allocation included 59% in equity (public equity, equity hedge funds, private equity, and venture capital), 24% in credit and absolute return (liquid and illiquid credit and other hedge funds), 10% in real assets (real estate, commodities and natural resources), and 7% in United States Government Bonds and Cash.
This asset allocation balances growth objectives and diversification, or returns and risk. Jacobson expanded, “Some of those categories [fall under] alternative investments. [The majority] of the large and most successful endowments have more than most in alternative investments…It’s one of the reasons we’ve done so well.”
Similar to peer institutions, in-house professional staff oversee Davidson’s investment strategies. The Board of Trustees’ Investment Committee and alumni advisors also provide input. Jacobson shared, “Many of our peers have similar or larger offices for the purpose of managing their endowments. A handful use consultants or outsource to do most of this work for them.”
Davidson partners with investment managers and only invests through fund and private partnership structures. Contrary to common misconceptions, Jacobson underscored that the “endowment has a robust process for selecting commingled investment funds and respective managers. The endowment does not invest in individual stocks…[and therefore] is not a shareholder in individual stocks.” Barrera added, “Ray [Jacobson] and Dave [Demeter, Investment Director,] are well versed on who [the managers] are and where they invest, but the managers are the ones who decide which securities to own or not own.”
To select managers and funds, Davidson’s investment staff seeks three main characteristics. Jacobson stated, “[The first is] managers who have competitive advantages [e.g., experience]. The second thing is opportunities where there are structural inefficiencies [e.g.,undervalued opportunities]. Three, we want to have a genuine partnership with the manager [e.g., aligned interests]. You want to have a two-way trust relationship with who you’re working with.”
Following the selection process, managers invest endowment funds in commingled funds or partnerships. Commingled funds include assets from various accounts, functioning as institutional versions of mutual funds.
Barrera commented on Davidson’s relationship with investment managers, noting, “Investment managers are ultimately choosing areas and companies that they feel are the most appropriate to protect and grow capital. We identify and select talented managers who have skill in…making that decision on behalf of all their investors, including Davidson.”
Jacobson affirmed, “We would not be able to invest in the vast majority, if not all, of our managers if we told them what to do and what not do. We are fortunate to have access to an exceptional roster of managers through relationship development and networking.”
Addressing investment responsibility, Jacobson offered, “We ensure managers are responsible and compliant with regulations. We are naturally attracted to people who we feel are good corporate citizens who want to back good management teams…We are not telling managers ‘we don’t want you investing in this country or this sector or these companies.’”
While many schools’ investments function similarly, some do invest in individual stocks. Jacobson expressed, “It can get more vocal with pension funds, especially state pension funds, because a lot of politics are involved there. Some people may want to highlight their political positioning. In many cases, state pension plans are invested in individual stocks, so there is a difference versus investing in commingled funds.”
Some students expressed dissatisfaction with Davidson’s investment transparency. Arianna Montero-Colbert ’19, a member of the past Divest Davidson campaign, shared, “As members of the fossil fuel divestment campaign on campus, we were constantly met with gendered accusations of our naivete.”
More than explaining financial processes, she believes that “transparency looks like an explicit process for students to advocate for meaningful systemic change through a real and defined pipeline of power holders at the college.”
Jacobson explained, “A lot of what we do could be considered proprietary. So to let that leak out would not be judicious or prudent.” But he added, “Many elements are not proprietary; we’re open to talking about the endowment… we feel we’re open and accessible, but there’s a lot of nuances and complexities related to how the endowment is invested.”
Although complex, campus organizations work to engage students with investments and finance. In an email, Quinn Fahey ’20, Chief Operating Officer of Davidson Investment & Financial Association (DIFA), shared that as one of the club’s components, “DIFA manages a small portion of the college’s endowment with oversight from the investment office. All ideas are student generated, pitched, and managed.” While anyone can attend meetings and make a pitch, only members can vote on changes to the portfolio, which includes equities and exchange-traded funds across seven sectors.
Regarding investment ethics, Nick Grzeszczak ’20, DIFA Chief Financial Officer, commented, “The pitch process to alter the portfolio requires thorough research and holistic consideration of a variety of factors…[including] expected performance, growth, management, and ethics. While our investment objectives aren’t structured around ESG (environmental, social, and governance) criteria, these factors are considered in our holistic process.”
Madison Abbott ’19 and Fiona Kolterman ’19 also recently began attempts to start the Davidson College Impact and Investment Group, centered around socially responsible impact investing. The group will aim to create a more inclusive culture and focus on social good in addition to generating high returns.
Kolterman acknowledged the Investment Office’s need to prioritize fund diversity to combat risk but remarked, “With that you lose a little bit of transparency, and it’s a little bit more elusive.” To increase student input, Abbott suggested Davidson mirror peer institutions. She noted, “they have students who are involved with these decisions, and I think it would be cool if Davidson could do that as well. As our student body continues to evolve, I think our investments should reflect that.”