This fact sheet accompanied a statement on divestment sent to the Middlebury community on Aug. 28, 2013.
The fossil-fuel divestment discussion at Middlebury College has raised many interesting questions. It also has focused attention on the complexity of managing an endowment of nearly $1 billion. Middlebury has prepared this fact sheet to provide background and context.
On July 1, 2013, the value of Middlebury’s endowment stood at $970 million. The endowment is the result of more than a century of giving by alumni, parents, and friends of the College, and the careful stewardship of those funds. The endowment is a trust that exists for the benefit of current and future generations. The Board of Trustees of Middlebury College stipulates how much of the endowment can be spent each year to support the College’s operating expenses. Under the budget for the 2014 fiscal year that started July 1, the endowment will provide $52 million—roughly 18 percent of the College’s operating expenses. If it is to continue to fund operations at comparable or increasing levels in the years ahead, the endowment must grow through new gifts and, especially, through the returns it earns on its investments. Ensuring that the endowment is well managed is one of the primary fiduciary responsibilities of the Board of Trustees.
Our Investment Approach
There was a time when the Investment Committee of the Board of Trustees reviewed and made individual investment decisions. But as our endowment grew, and the world of investment management grew more complex, that model became unwieldy and insufficient to cope with the evolving investment landscape. In 2005, Middlebury College hired the investment firm Investure to manage our endowment. Investure now manages the endowments of 13 colleges, universities, and foundations with a combined fund of about $10 billion.*
Investure’s active approach to investing is similar to that used by other large endowments. That is to say, it makes very few investment decisions directly. Instead, Investure invests money in large funds run by independent managers, whom Investure selects based on the strategies and performances of those managers over time. Investure works with more than 150 managers at any one time to invest its $10 billion portfolio.
These independent managers don’t work solely for Investure. Their own funds are made up of the commingled assets of many other clients, individuals, and institutions alike, and may be invested in domestic and international equities, bonds, private partnerships, venture capital funds, real estate, and other investment vehicles.
Investure’s performance over time has been superb. The returns on Middlebury College’s endowment have been in the top decile of endowments tracked by the National Association of College and University Business Officers and are in the top quartile of our peer institutions. In fact, for the 12 months ended June 30, 2012, the Middlebury endowment investment performance was at or exceeded the median return of the eight Ivy League endowments for 1-, 3-, 5-, and 10-year time horizons. The Middlebury five-year return was second only to Columbia University.
Specifically, Middlebury College’s 10-year annualized return as of June 30, 2013, was 9.9 percent. That compares to 7.3 percent for the Standard & Poor’s 500 Index, which would be considered a “passive” investment vehicle. Equally important, Investure’s active diversification strategy reduces volatility, which is particularly important in a down market.
It is important to understand the significance of that 2.6 percentage-point difference between our actual return and that of the S&P 500. Over 10 years, $1 billion invested in the Middlebury endowment at an annualized return of 9.9 percent would have grown to $2.57 billion. Cut that return to 7.3 percent and it would have grown to $2.02 billion—a difference of $550 million.
The Difficulty and Cost of Divestment
Some of the 150 fund managers chosen by Investure have investments (albeit at times small) in the energy sector, either in public companies or through private partnerships. At different times this year, Investure has calculated that between 3 and 5 percent of Middlebury’s endowment is invested in the fossil-fuel sector. The amount varies as managers buy and sell holdings.
It is unlikely that any of the 150 fund managers who today invest Middlebury’s endowment in their commingled funds would adopt a policy of fossil-free investing. Whether or not they hold such investments today, investment managers who are incented to maximize their returns do not wish to limit their investment choices. This is the answer to the often-asked question of why Middlebury, or any institution with a large endowment, cannot easily divest an endowment of fossil-fuel stocks. In Middlebury’s case, Investure would have to reinvest more than half of its portfolio. And it would have to gain the agreement of the other 12 institutions it represents to do so. As this is unlikely, we almost certainly would have to withdraw from the Investure consortium, at considerable cost now and in the future.
Middlebury’s Environmental Record
Middlebury College is a recognized leader among colleges and universities that seek solutions to the world’s most pressing environmental challenges. Some examples:
- The College established the country’s first environmental studies program in 1965. Since then our students and alumni have initiated and supported countless environmental and sustainability projects around the world.
- In 2007 Middlebury announced an ambitious commitment to achieve carbon neutrality on our campus by 2016. The College is on track to achieve that goal.
- We have made visible campus investments exceeding $12 million in wind, solar, and biomass energy generation. This spring the Board of Trustees approved a $1.7 million project to upgrade the campus central heating plant to accept a wide variety of cleaner fuels.
- We seek LEED Gold certification for new and renovated buildings.
- Students at the College established recycling and composting programs decades ago, long before they became fashionable.
- Middlebury’s Solar Decathlon team has qualified twice for the U.S. Department of Energy’s Solar Decathlon competition, which highlights the commitment to developing alternative energy solutions.
- The Franklin Environmental Center—Vermont’s first LEED Platinum building—serves as a hub for campus environment leadership and learning and Monterey’s new Center for the Blue Economy will be a leader in environmental marine policy.
* Investure Clients: Middlebury, Barnard, Carnegie Endowment for International Peace, The Edna McConnell Clark Foundation, Colonial Williamsburg, The Commonwealth Fund, Dickinson College, Houston Endowment, Henry Luce Foundation, Rockefeller Brothers Fund, Smith College, Trinity College, The University of Tulsa