A longtime multimillion-dollar donor to the University of Colorado Foundation says the foundation invested its funds so poorly over the past decade that it’s shorted itself and the university of about $1 billion in earnings while shoveling tens of millions more to useless money managers.
All the while, 93-year-old Clarence Herbst says the foundation — the private nonprofit fundraising arm of the state’s largest public university — has done little to heed years of his financial advice, eventually pushing him out of the largely honorary role as one of its dozens of trustees. He had been the foundation’s board chairman in the 1990s and helped direct its investments.
Herbst and three others sued the foundation last year, but a Denver District Court judge dismissed the complaint saying only the Colorado attorney general could sue a nonprofit over how it handles its finances. Herbst has taken the case to the Colorado Court of Appeals with a stern argument: The public, which includes students, alumni and donors, has a vested interest to oversee a public university’s endowments.
The difficulty, however, is that the foundation is a private nonprofit supposedly separate from the public university. As such, the foundation says the public hasn’t any right to oversee anything it does — even though the university relies on its money and it’s the vehicle for alumni to support the school.
“What would the citizens of Colorado say of the 20 people on the foundation board of directors who have a say and manage it with no other oversight whatsoever?” Herbst asked during an interview from his Aspen home. “That’s university money.”
Academic studies back Herbst, showing that university endowments across the country — some with billions more than the CU Foundation — aren’t performing anywhere near as well as they could, largely because they let money managers try to anticipate the markets.
Herbst is the retired chairman and CEO of Resinoid Engineering, which largely makes products for the automotive industry. By his estimation, he’s donated at least $5 million to his alma mater and his benevolence has not been overlooked: Herbst Academic Center at CU Boulder and McCord-Herbst Student Veterans Center at the CU campus in Colorado Springs are named for him.
Much of the problem, Herbst says, is the foundation has lost profits ever since it hired ex-employee Chris Bittman to handle its investments more than a decade ago. Rather than put its money into passive index funds that casually track the S&P500 — just as Warren Buffet does — the foundation allows donor money to be invested in riskier securities.
As a result, it pays more and earns less, Herbst says. And it’s the university and its students who are being shorted.
“It’s my university, I loved it, it gave me a good education,” Herbst said. “Last year they could have gained $154 million extra in just that year by following what I’ve suggested. And this year it’s going to be upward of $200 million they’ve left on the table with their miserable investment results.”
When he worked at the foundation, Bittman managed its investments in-house beginning in 2004, then left in 2009 for a private firm that lured him away when he turned in one of the best years among any university endowment nationally.
Almost immediately and without any formal bidding process, the foundation gave all its money to Bittman’s new employer – Perella Weinberg Partners – to manage. At the time, foundation officials said the expectation was to save on the $2.4 million it was costing them for the in-house management.
In the decade since, he’s helped turn what had been a $700 million fund into a $2.5 billion one, with returns that last year topped 4%. Although much of the fund’s increase has been through donations, its investment pool is now at a beefy $1.8 billion.
But tax records show it’s actually cost the foundation nearly 10 times what they had spent each year when it was an in-house operation, not just for Bittman’s help, but the work several dozen others under his oversight.
The foundation says it’s not nearly as reckless as Herbst makes it sound, and is proud of the results its investment managers have attained, generally better than hoped. It’s carefully considered all its options several times before sticking with the choices they’ve made, and that includes Bittman.
“Our perspective is we follow best practices, and most compelling to us on performance is the extraordinary results,” UCF president Jack Finlaw said in an interview. “We are in the top quartile when compared to similar endowments.”
“Their reasons simply don’t hold water,” Herbst explained. “The risk they’re taking with Bittman is awful, and the reward is they’re doing a crappy job earning money.”
Nationally, the amount of money at stake in university endowments is a significant and critical revenue stream. The U.S. Department of Education’s National Center for Education Statistics says that at the end of fiscal year 2018, the most recent information available, colleges and universities nationwide held more than $648 billion in endowment funds, an 8.5% increase from the previous fiscal year. The largest was Harvard University, with $39.2 billion. The University of Colorado did not rank among the top 120 universities, but the foundation’s $2.5 billion would have ranked 60th.
It’s not that the foundation isn’t funding the school well. It annually gives money to the university for various things ranging from academics (the most) to athletics (the least). Last fiscal year it was $209 million.
The outcome of the lawsuit is significant, not just for CU but all universities with a sizable endowment stream. That’s why Colorado State University, Metropolitan State University of Denver and the Colorado School of Mines jointly filed a statement with the appellate court — through Attorney General Philip Weiser’s office — trying to persuade it to keep Herbst and others like him from questioning how the money they hold is ultimately managed.
“Colorado law does not give donors, indirect beneficiaries or financial hobbyists standing to sue charities,” Assistant Attorney General Joseph Peters wrote in the brief. “That’s a good thing. The traditional limits on standing protect charities from (a flood of) constant litigation by those who would second-guess their investment decisions.”
Peters added: “Every one of the Coloradans served by (or who has donated to) those nonprofits would arguably have standing to sue them. … And the same standing would threaten thousands of mom-and-pop nonprofits.”
The result, he wrote, would be financial and legal mayhem.
But that’s precisely what Herbst said should happen. Having donors and the students and faculty who benefit from those dollars looking over the foundation’s shoulder would ensure it manages the funds for the safest and most secure return.
That, according to Herbst, has been the S&P500 passive index fund at Vanguard, which realized a compound annual return of 14.8% over the past decade — outperforming the foundation’s returns by about 5.5% each year, the lawsuit says. In fiscal year 2019-20, the Vanguard index garnered a 7.37% return.
By comparison, Bittman and the other managers of the foundation’s funds came back with a 10-year annualized return of 8.43%, and just 4.2% for the 2019-20 fiscal year — while collecting more than $20 million in fees annually for the privilege.
“When you listen to Herbst’s arguments, we should have put 100% of the portfolio into passive index funds. No reasonable person would have done that,” Finlaw said.
However, studies are showing that university endowments that are actively managed and invested might not be doing as well as implied, according to New York University finance professor David Yermack, who conducted his own analysis.
Yermack’s study looked at the financial returns from the top 50 university endowments as ranked in 2021 by U.S. News and World Report and determined “the investment wisdom… amounts to little more than a myth.”
“I think there is a general trend of exaggerating how well universities do. The introduction to finance course information seems to be totally lost to the people with the responsibility of managing these funds,” Yermack said in an interview. “Even the very top performers are lucky to do average, and as a group, they do worse than average. They would all be better off if they just owned the index funds.”