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University Endowment Sued for Underperforming the S&P 500
A 94-year-old donor is taking on the University of Colorado Foundation over active investing.
Clarence Herbst, a prominent donor to and alumnus of the University of Colorado, has sued the school’s foundation over its investment strategy and so-called “abysmal” returns.
But the UC Foundation — which holds nearly $2 billion for the public university — has outperformed most of its peers over short and long-term horizons, according to the mainstream NACUBO benchmark.
Herbst is a longtime and vocal advocate of passive investing. He has donated about $5 million to his alma mater and received various honors and officials designations from the university, including the chairmanship of its investment committee in the 1990s.
“He has carried this banner for decades,” said Jack Finlaw, president and CEO of the foundation, in a Monday phone interview with Institutional Investor. Finlaw sounded somewhat weary at the accusations Herbst leveled, including that the endowment’s board had violated its fiduciary duty by opting for active management, as is standard for U.S. nonprofits of CU’s size.
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“There is a clear divergence in philosophy” between Herbst and foundation officials “on how to invest a large and complex portfolio,” Finlaw said. “We feel that to put all of our assets into one asset class with high risk and volatility would not be in the interest of the University of Colorado.”
Herbst’s suit advocates for one fund in particular to replace CU’s diversified portfolio: Vanguard’s S&P 500 index tracker, which charges almost nothing in fees and replicates the movement of the largest 500 U.S. stocks.
“The CU Foundation has underperformed the S&P 500 fund by approximately 5.49 percent per year from 2010 to 2019,” claims Herbst’s suit, which he filed along with three other named plaintiffs on July 15 in Denver district court. They seek class-action status and “look forward to litigating this dispute,” their attorney Matthew Johnson wrote II in an email.
According to the complaint, CU’s “abysmal investment performance, which could have been significantly improved by simply investing in broad market U.S. equity index funds and not being over weighted in actively managed investment and ‘alternative investments,’ has cost the CU Foundation, and therefore the class, approximately $1 billion in the last decade.”
An outside firm, Perella Weinberg Partners, does the actual investment management. While not named as a defendant in Herbst’s suit, the company’s performance comes under fire. Perella Weinberg did not respond to a request for comment.
“The CU Foundation insists on irresponsibly and blindly paying Perella Weinberg Partners and dozens of other active managers and hedge fund managers tens of millions of dollars per year in advising fees to underperform relative to the market,” the complaint went on.
Finlaw asserted confidence in Perella Weinberg, and said the organization is “holding its feet to the fire” on fees and performance.
“We really believe that the case is without merit, because we’ve been looking at these issues in conversation with the plaintiffs for years. We believe, and our board believes, that following the plaintiffs’ demands would be a breach of our fiduciary duty. And it would not be consistent with the best practices of colleges and university endowments across the country.”
The foundation will defend itself, Finlaw said.