Wednesday, September 21, 2016

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.

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Jim Gust said...

Turns out the Harvard endowment lost 2% last year.

JLM said...

Don't have time to analyze your tax cost analysis, but I don't believe it. Surely I don't have to give to Harvard to avoid capital gains tax. Dying will do the trick.

Jim Gust said...

Yes, if you hold the assets until death. And some portion of that $7 billion may have been pledges to be remembered in a will, not current gifts, i suppose.

But I was riffing off of the old examples promoting charitable gifts of appreciated property, in which we always added the value of the deduction to the capital gains taxes avoided. I used a 40% tax rate--not too far from the top rate of 39.6. If anything, I probably understated the tax cost.

After all, once the contribution has been made, tax on the investment income is lost forever. What's the present value of that?