This content is from: Culture

Active Management Finally Gets a Win… In Court

Sued for lagging the S&P 500, a university endowment prevails.

A Colorado judge has permanently dismissed an unusual lawsuit that had captured attention in online investment communities and inspired fear in some industry watchers. 

A major University of Colorado donor and three recent graduates had sued the school’s $2.4 billion foundation over its “expensive, fee-laden, actively managed, and alternative-investment-dependent investments,” as they described in legal filings. 

But the active and alts-oriented strategy is standard for U.S. endowments and foundations of that size, and CU has beaten most of its peers, according to the National Association of College and University Business Officers and a CU fund executive.

[II Deep Dive: A University Endowment Got Sued for Lagging the S&P 500. Now, It’s Fighting Back.]

For donor Clarence Herbst, who is in his 90s, the lawsuit appeared to be a culmination of his decades-long battle against active management. The Warren Buffett acolyte advocated for passively investing his alma mater’s billions in low-fee equity index funds, specifically Vanguard Group’s S&P 500 tracker. “Even in the face of a global health pandemic, and what appears to be another recession, the index funds advocated for by plaintiffs are almost certainly trouncing the CU Foundation,” the latest complaint stated. 

The university threw its weight behind the CU Foundation’s defense and called for a dismissal, arguing that Herbst and his fellow agitators had no standing to sue for damages to the institution, if that harm had even occurred. 

“While people can have various opinions on active-versus-passive investing, it really doesn’t rise to a legal issue,” foundation president Jack Finlaw told Institutional Investor last month. 

A judge agreed.  

Last week, the Denver court granted the university’s request and threw out the case “with prejudice” — making a final and fatal ruling against a lawsuit’s merits. 

The notion of taking an endowment fund to court over its mainstream investment strategy had spooked many industry insiders and sparked chatter on social media. 

“This can’t prevail,” wrote one Reddit user in reaction to the suit. “If it does, then other universities (or even the same one) can be sued for using passive investments if the plaintiff can show that active investments would have performed better over a time period, to say nothing about the different investment strategies being employed.”

“Exactly,” another agreed. “The ‘there exists an investment strategy which would have beaten the one you picked’ is always true.” 

On Twitter, a voluble investment critic and self-proclaimed “President of the Zero-AUM Club” suggested that the foundation’s strategic error wasn’t with its investing, but rather donor relations: “Sounds like foundation forgot to send Clarence Herbst some football tickets.”

Related Content