Investors are fuming about high fees and weak results. Their view is that investment managers take their money and run. In short, it's the perfect situation for a Myth Buster investigation.
Money shifts as current alternatives sour and attractive prospects open. PIMCO is a current example, suffering withdrawals that may be as high as $140 billion last year from its highly regarded Pimco Total Return Fund (PTTRX). The reason is the departure of their popular and successful fund manager. Gold, blue chips and BRICS have also seen money race in and out. Also suffering is the Third Millennium Russia Fund (TMRFX), which turned in a -7.53% return over the last year. Naturally, investors move money to better alternatives…but do unhappy investors run?
The Sinking Portfolio
Consider the experience of the Commonfund, which positions itself as providing special care for college endowments and other not-for-profit investment pools. In case anyone is not certain, not-for-profits worry a great deal about profit – tuition revenue, tickets to sporting events, sales of products and money spun off from gifts (endowments). Museums, arts organizations and colleges need a great deal of revenue to survive. The Commonfund specializes in this arena. Not only do they invest money but they provide advice on such topics as assessing risk tolerance, the economic outlook and global private equity. They offer charts and tables comparing one investment pool to many others. They facilitate the information flow – and this pleases not-for-profits. The problem has been weak results. The Commonfund generated some miserable results, -25.8% in 2008, and their reputation declined.
So, did the colleges and other not-for-profits take their money and run elsewhere? Over the years, the fund’s asset base has shrunk from about $30 billion in 1990 to about $20 billion now. Not from poor returns, but from a steady ebb of investors pulling their funds away. They did not run, they walked slowly, double checking their risk tolerance charts and global private equity comfort along the way. Why the slow loss of assets? With the Commonfund, which serves many colleges, misery loves company.
Big Pac 12, Even Bigger Ten, and Biggest $500 Million Pool
Not-for-profits thrive on funding. The first ever NCAA football championship took place in January, 2015. Ohio State defeated University of Oregon by a score of 42 to 20. Talk about taking the money and running! According to the Wall Street Journal, ESPN, owned by The Walt Disney Company (DIS) , achieved its highest ratings ever, and raised its advertising fees to almost $1 million for 30 seconds of ad time. The game itself is also said to be worth $500 million to the colleges and their conferences. That is close to the total of University of Oregon’s endowment ($600 million). A great deal of running took place. Ohio State ran for 296 yards; Oregon for 132. So, the universities, the NCAA conferences and ESPN took the money and the players ran. The myth is doing pretty well in this case.
Who exactly takes the money? The “Power Five” conferences (ACC, Big Ten, Big 12, PAC-12, SEC) get about $50 million each. Smaller conferences also take a portion of the net revenue. Each conference will settle on a revenue sharing formula. Oregon fans will be pleased that size of endowment was not a score predictor. Ohio State’s $3.2 billion dwarfs Oregon’s $553 million. Imagine a score of 41 to 7.
Once upon a time, college football was about good sportsmanship. Presidents Eisenhower, Nixon, Ford and Reagan played college football. The scholar athletes are now linked to the distant past. Today, taking the money is paramount. Replacing the older system, in which the national champion was selected by polls, the new system is a limited playoff. The four top teams play and those winners play in the new championship game, with the whole process spinning off a great deal of revenue.
Keep in mind, the players are students on scholarships. A committee is in place to select the teams that will play off. Wouldn’t it make sense to choose the elite four by checking the grade point averages of the players? How about interviews with the players to determine if they are both good athletes and good students? If they win, maybe they would earn more money for books. Sound reasonable?
Miss America is also a contest for a national champion. According to their website, contestants are judged in Artistic Expression (Talent); Presentation and Community Achievement (Interview); Presence and Poise (Evening Wear); and Lifestyle and Fitness (Swimsuit). The final night also includes Peer Respect and Leadership (sounds like good sportsmanship) and Knowledge and Understanding (as in “scholar athletes”). Scholarships are awarded. The college football champion is selected only by points scored. The NCAA could learn a lot from Miss America!
So, this myth proves thorny. The Miss America Contestants do not run; they walk down the runway. Winners are selected in part by a knowledge component and they receive scholarships. The NCAA makes athletes on scholarship run as fast and as hard as they can, judges its winners based on total points scored and doles out the money to conferences that run back to campus with it. Neither Ohio State nor University of Oregon use the Common Fund. Their risk tolerance appears to relate to forward passes. More on this myth will appear in the next installment.
Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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