Yale Beats Harvard, But . . .

Yale's endowment eked out an investment return of 3.4 percent for the fiscal year ending last June, handily beating Harvard, whose endowment lost 2 percent.

Many endowments suffered negative returns in fiscal 2016. Untutored amateurs who simply invested in a S&P 500 index fund did better, making about 4 percent.

Like the rest of us, university endowments are learning that we live in interesting but difficult times. After necessary expenditures, Yale's fund actually shrank during fiscal 2016.

Remember the good old days, when Yale boasted an annualized ten-year return of almost 18 percent?

Does Inheritance Lead to Inflation?

From Breaking the Silence on the Inheritance Boom, Prudential's sponsored content on The Washington Post site:

Over the next 30 years, a wealth transfer of nearly $58 trillion is expected to change hands from baby boomers to younger generations in the form of inheritance, according to a recent study from the Boston College Center on Wealth and Philanthropy. ••• The enormous wealth transfer will give the next generation more money to spend, leading to increases in higher education tuition, insurance premiums and housing prices.

Not so long ago, it was the baby boomers who were expected to inherit incredible sums. It didn't trigger inflation.  Will the millennials' Great Expectations have greater impact?

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When marketing online, content is king. Prudential is a new customer for The Washington Post's Brand Studio. Other financial types using the Post's marketing platform include Citi, Goldman Sachs, JPMorganChase and, briefly, T Rowe Price. Mostly their content highlights their good works. Prudential's offering is more akin to an online newsletter article.

Harvard is bringing up the rear

Today's WSJ has an interesting piece for money managers:  Harvard's Money Troubles is the headline in the print edition, slightly changed online.  Harvard comes in third worst in the Ivy League annualized return over the last 10 years, 7.6% versus Yale's 10.0%.  They can't seem to keep their investment chiefs anymore, and if you read all the way to the end of the article it turns out that raiding other schools for talent isn't working either.  MIT's endowment chief passed when he was approached about moving to Harvard, for example.

The article doesn't mention it, but the real trouble started in 2005, when many ignorant Harvard alumni were incensed that their legendary investment manager, Jack Meyer, was paid $7 million for his services one year.  By comparison, comparable private sector managers were paid $251 million at the time.  The alumni effectively forced Meyer's resignation.  JLM commented here, and I followed up four years later here.  Looks like the lesson still has not been learned.

 Fortunately for Harvard, their alumni are willing to increase their giving to make up for lackluster investment performance.  Harvard launched a $6.5 billion capital campaign in 2013. They crossed the $7 billion mark in gifts and pledges last June 30, and the campaign will continue to June 30, 2018.

That amount of charitable giving leads to a shortfall of roughly $2.8 billion in federal income tax collections, depending upon your assumptions of the donors tax situations.  (Charitable deductions plus capital gains taxes avoided by giving appreciated property.)  It also suggests that about $3 billion in federal estate and gift taxes will be avoided.  Harvard has roughly 10,000  undergrad and graduate students.  So that is a federal subsidy of $280,000 per student at Harvard, whose endowment comes to $37.6 billion.  What do you suppose the tax subsidy for the endowment is worth?  Meanwhile, one presidential candidate wants to reduce the cost of public colleges to zero.

Something is wrong with this picture.

One Hundred Years Old and Still Raising a Fuss

Next to establishing the national park system, the federal estate tax was our government's best idea a century ago. Or was it? According to the Tax Foundation, the estate tax may shave almost one percentage point off GNP over the next decade. 

Harvard's N. Gregory Mankiw asserts the estate tax is unfair:

Consider the story of two couples. Both start family businesses when they are young. They work hard, and their businesses prosper beyond anything they expected. When they reach retirement age, both couples sell their businesses. After paying taxes on the sale, they are each left with a sizable nest egg of, say, $20 million, which they plan to enjoy during their golden years. 

Then the stories diverge. One couple, whom I’ll call the Frugals, live modestly. Mr. and Mrs. Frugal don’t scrimp, but they watch their spending. They recognize how lucky they have been, and they want to share their success with their children, grandchildren, nephews and nieces. 

The other couple, whom I’ll call the Profligates, have a different view of their wealth. They earned it, and they want to enjoy every penny of it themselves. Mr. and Mrs. Profligate eat at top restaurants, drink rare wines, drive flashy cars and maintain several homes. They spend their time sailing the Caribbean in their opulent yacht and flying their private jet from one luxury resort to the next. 

So here’s the question: How should the tax burdens of the two couples compare? Under an income tax, the couples would pay the same, because they earned the same income. Under a consumption tax, Mr. and Mrs. Profligate would pay more because of their lavish living (though the Frugals’ descendants would also pay when they spend their inheritance). But under our current system, which combines an income tax and an estate tax, the Frugal family has the higher tax burden. To me, this does not seem right.

Almost all commenters on Mankiw's column were pro estate tax. Some considered frugality un-American. 

Teddy Roosevelt, godfather of the national parks (and a Republican), advocated a stiff, highly progressive estate tax.  The national parks were a really good idea. The estate tax? That issue is far from settled.

Below, Teddy on a visit to Yellowstone. More early national park photos here.

Great Moments in Financial Engineering

From The Wall Street Journal:

"Traditional certificates of deposit offer better interest rates than normal savings accounts for customers who agree to lock up funds for a period of time. Since the 1960s, they have been among the most popular products retail banks offer. Now Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early."

Although the "GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit" proved toxic, a lot of risk-averse investors would welcome an honest product engineered to convert, say, a volatile return on stocks averaging 7% into a CD paying a steady 3.5 or 4%. Possible?

Last of the Great Stock Pickers?

Perhaps the only clue that Ronald Read, a Vermont gas station attendant and janitor who died last year at age 92, had been quietly amassing an $8 million fortune was his habit of reading the Wall Street Journal, his friends and family say.