The long-time multimillion-dollar donor to the University of Colorado Foundation says the foundation has invested its funds so poorly over the past decade that it has robbed itself and the university of nearly $1 billion, while Has shoveled tens of millions more worthless money managers.
Throughout, Clarence Herbst, 93, says that the foundation—the private nonprofit fundraising arm of the state’s largest public university—has done little in her years of financial mentoring, eventually leading to her becoming a massive But dropped out of the honorary role. Dozens of its trustees. He was the foundation’s board chairman in the 1990s and helped direct its investments.
Herbst and three others sued the foundation last year, but a Denver District Court judge dismissed the complaint, saying only the Colorado Attorney General could sue a nonprofit over how it handles its finances. is. Herbst has taken the matter to the Colorado Court of Appeals with a stern argument: The public, including students, alumni, and donors, has a vested interest in overseeing the endowment of a public university.
The difficulty, however, is that the foundation is a private nonprofit that is supposedly separate from a public university. As such, the foundation maintains that the public has no right to oversee anything it does – even though the university is dependent on its money and it is a means for alumni to support the school.
“What about the 20 people on the Citizens Foundation board of directors of Colorado who have no other oversight and manage it?” Herbst asked during an interview from his Aspen home. “That’s university money.”
Herbst’s academic study shows that university endowments across the country—some with billions more than the CU Foundation—are not performing anywhere near as well as they could, mainly because they allow money managers to anticipate the markets. Let’s try.
Herbst is the retired President and CEO of Resinoid Engineering, which manufactures products for the automotive industry at large. By his estimates, he’s donated at least $5 million to his alma mater and his generosity hasn’t been overlooked: the Herbst Academic Center at CU Boulder and the McCord-Herbst Student Veterans Center on the CU campus in Colorado Springs. The name is named for him.
Herbst says most of the problem is that the foundation has lost profits because it hired former employee Chris Bittman to handle its investments more than a decade ago. Instead of putting its money into passive index funds, which casually track the S&P 500 — like Warren Buffett does — the foundation allows donor money to be invested in riskier securities.
As a result, it pays more and earns less, Herbst says. And it is the university and its students who are being scaled down.
“It’s my university, I loved it, it gave me a good education,” Herbst said. “By following what I suggested last year they could have got an additional $154 million in that year. And this year it’s going to be above the $200 million they have left on the table with their pathetic investment results. “
While he worked at the foundation, Bitmain managed his investments initially in 2004, then left for a private firm in 2009, which earned him one of the best years among any university endowment nationally. Changed.
Almost immediately and without any formal bidding process, the foundation gave all of its money to manage Bitmain’s new employer – Perella Weinberg Partners. At the time, foundation officials said they expected to save $2.4 million for in-house management.
In the decade since, he’s helped turn a $700 million fund into $2.5 billion, with returns above 4% last year. Although most of the fund’s growth has come through donations, it now has an investment pool of $1.8 billion.
But tax records show that it actually cost the foundation about 10 times what they spent each year when it was an in-house operation, helping not only Bitmain, but several dozen others under his care. used to work.
The foundation says it’s not nearly as reckless as Herbst makes it sound, and its investment managers are proud of the results they’ve achieved, usually better than expected. All of its options are carefully considered at times before sticking with the one they choose, and this includes Bitmain.
“Our approach is that we follow best practices, and the results most attractive to us on performance are exceptional results,” UCF President Jack Finlaw said in an interview. “We’re in the top quartile compared to similar endowments.”
“Their reasons are simply no water,” Herbst explained. “The risk they are taking with Bitmain is terrible, and the reward is that they are doing a crappy job of making money.”
Nationally, the amount at stake in university endowments is a significant and important revenue stream. The U.S. Department of Education’s National Center for Education Statistics says that at the end of fiscal year 2018, the most recent information available, colleges and universities have more than $648 billion in endowment funds, an increase of 8.5 percent from the previous fiscal year. % is more. The largest was Harvard University with $39.2 billion. The University of Colorado did not rank among the top 120 universities, but the Foundation’s $2.5 billion would have ranked 60th.
It is not that the foundation is not funding the school well. It gives the university money annually for a variety of things, from academics (at most) to athletics (at most). It was $209 million in the last fiscal year.
The outcome of the lawsuit is significant, with a large endowment stream not only for CU but for all universities. That’s why Colorado State University, Metropolitan State University of Denver and the Colorado School of Mines jointly filed a statement with the appellate court — through the office of Attorney General Philip Weiser — asking Herbst and others like him this question. Was trying to persuade them to stop how the money they hold is ultimately managed.
Assistant Attorney General Joseph Peters summarized, “Colorado law does not allow donors, indirect beneficiaries or financial hobbyists to sue over donations.” “That’s a good thing. Traditional limits on standing protect charities from constant litigation (flooding) by those who anticipate their investment decisions.
Peters said: “Every single Coloradans who have served by (or who have donated to) those nonprofits will certainly stand to be prosecuted. … and thousands of nonprofits will be threatened by the same situation.” “
The result, he wrote, would be financial and legal catastrophe.
But that is exactly what Herbst said should happen. Having donors and students and faculty who benefit from those dollars looking over the Foundation’s shoulders will ensure that it manages the funds for the safest and safest return possible.
The lawsuit says that, according to Herbst, Vanguard has had an S&P 500 passive index fund, which has realized a compound annual return of 14.8% over the past decade — outperforming the foundation’s returns by about 5.5% each year. . In the financial year 2019-20, Vanguard Index achieved 7.37% return.
By comparison, Bitmain and other managers of the foundation’s fund returned with a 10-year annualized return of 8.43%, and just 4.2% for the 2019-20 fiscal year – collecting more than $20 million in fees annually for the privilege. doing.
“When you hear Herbst’s arguments, we should have put 100% of the portfolio in passive index funds. No reasonable person would have done that,” Finlaw said.
However, studies are showing that university endowments that are actively managed and invested are not doing as well, according to New York University finance professor David Yermack, who conducted his own analysis.
Yermack’s study looked at financial returns from the top 50 university endowments ranked by U.S. News & World Report in 2021 and determined that “investment wisdom … is little more than a myth.”
“I think there is a general tendency to exaggerate how well universities perform. “Introducing finance course information to those with the responsibility of managing these funds is perfect,” Yermack said in an interview. “Even the very top performers are lucky to do average, and as a group, they perform worse than average. If they just owned the index fund they would all be better off.”