Playing for the Big Green

“Pay to Play” is a pernicious system.

Some nonprofits use their investment portfolios as fundraising tools. Periodically, the nonprofit asks investment management firms to submit proposals on how they would manage a portion or all of the organization’s investments, and what they would charge. When the proposals are evaluated, the nonprofit also examines the record of charitable contributions they have received. Unless a manager is on the list of the organization’s donors (they “pay”), they won’t have a chance of being hired (“playing”).

It’s pernicious because it uses a business contract to extract donations. The investment management should be conducted by the firm best suited to tailor the charitable organization’s endowment to fit within its overall financial picture, and in the case of a large endowment, then managed by the best performing companies within each allocated sector. But with “pay to play,” performance is secondary to donations.

An anonymous letter to the New Hampshire Attorney General accuses Dartmouth of taking “pay to play” to a ridiculous extreme. The authors name ten current or former Trustees of the College that either manage or direct the management of over $1 billion of Dartmouth’s $3 billion endowment. Many of those Trustees have been generous benefactors of the College, donating millions and seeing buildings named after them. But at the same time they or their firms have also earned millions in management fees from the endowment.

During this period the growth of the college’s endowment has been the worst in the Ivies. From 2000 to 2011 the endowment grew less than 3% per year, in spite of major capital campaigns, while the average Ivy League endowment grew over 5%. Not all of that is due to sub-par investment performance, but some is.

Any Trustee that stands to benefit from a large institution’s business should step aside. There are plenty of people willing to serve. Either that, or they should manage the organization’s finances pro-bono. I would.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350 • •

Booking a Bankruptcy

Does Houghton Mifflin’s bankruptcy have a larger meaning?

Last week Houghton Mifflin Harcourt Publishing Company declared bankruptcy in the US District Court in Manhattan. The Boston-based publisher claimed that cutbacks in state and local education budgets meant that school districts around the country just weren’t buying textbooks fast enough for it to be able to service its debt. The bankruptcy comes as booksellers adjust to the advent of the Kindle and other eReaders.

The storied company has a long history, going back to 1832. They were Ralph Waldo Emerson’s publisher, and their titles include The Lord of the Rings, Curious George, and computer games like The Oregon Trail. But history is no guarantee of solvency. They listed $2.7 billion in assets and $3.5 billion in debt. Under the proposed plan, the company’s bonds would convert into equity, and existing shareholders would receive five-year warrants on the new shares, but nothing more.

The company has a 40% market-share of the K-12 educational publishing business, which isn’t going away. But net sales fell 14% last year amid budget cutbacks. In part, the company is a casualty of the Meredith Whitney thesis, as tight state and local budgets require cutbacks and deferrals. And the educational market, while steady, is not bomb-proof. Excessive leverage means that economic cycles can wipe out the equity of a company.

But the company isn’t going away. Under the new capital structure they will vigorously defend their market position, and they’ll have the flexibility to continue expand into digital content and international markets. Bankruptcy isn’t the end of the story.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350 • •

Skin in the Game

How can colleges be encouraged to control their costs?

College costs are ridiculous. As our economy becomes more knowledge-based, additional training is more necessary than ever in order to add value to an employer. A four-year degree from many private schools now costs between 200 and 250 thousand dollars. For most families, the prospect of paying upwards of half a million dollars for their children’s education is daunting.

Continue reading Skin in the Game

The Failure Effect?

Will Facebook forever live under the cloud of its lousy IPO?

As revelations keep coming in about bankers behaving badly, company executives making rookie errors, and institutional investors bailing at the last minute, it’s helpful to remember: we’ve seen this movie before.

Back in 2004 Google had troubles with its public offering. The pricing was in question. The number of shares was in question. The principals used a quirky auction IPO to cut out Wall Street. Then, in the middle of all this uncertainty, Playboy published an interview with founders.
Continue reading The Failure Effect?

The Facebook Effect?

Well that was a short honeymoon.

Some large shareholders who participated in Facebook’s initial public offering have turned around and sued the company, its CEO, and its bankers claiming that just before the IPO the company and bankers materially lowered their revenue forecasts for next year and didn’t tell them. That, they claim, is why the stock declined almost 20% after launching at $38 per share, almost 100 times last year’s earnings.

I suppose it’s the American way to find someone to sue when something goes wrong, but this is ridiculous. Continue reading The Facebook Effect?

The Success of Failure

The Success of Failure


What makes a successful innovation?


The US has been blessed by a series of dramatic innovations over time: electrification, telephones, personal computers. Some of these have been truly disruptive, changing not only the way people do their jobs, but the very jobs themselves. Indeed, mastering the dynamics of innovation is critical for any company. In the past year corporations that file with the SEC used the word “innovation” over 33 thousand times in their annual and quarterly reports!


But by its very nature innovation is unpredictable. Doing new things in new ways upsets the status quo. Email is challenging the Postal Service; digital photography probably bankrupted Kodak.


And implementing innovation is risky. Continue reading The Success of Failure

Facing the Books

Should you buy shares of Facebook?

Before I answer that question let me re-state the obvious: this blog doesn’t dispense investment guidance, recommendations to buy or sell securities, or anything remotely resembling advice. For that you need someone who can tailor a plan to fit your particular goals and constraints. Blogs don’t do that.

But having said that, is it a good idea to buy Facebook now? After all, many people get a lot of enjoyment buying MacDonald’s shares and eating at MacDonald’s, buying Disney shares and going to Disneyland, refinancing their mortgages and owning shares of—wait, that one didn’t work. Continue reading Facing the Books

Capital Thinking

What are capital controls, and why do countries have them?

Capital controls are restrictions on money flows. Countries enact them to control the flow of cash into and out of their economy. They can take the form of alternative exchange rates, market regulation, and sometimes outright prohibitions. Most countries have some kinds of rules around money flows. In the US, we regulate cash movements into and out of the country, and we take special note of large cash transactions by bank customers, primarily to fight drug trafficking and terrorism.

But capital controls are usually associated with developing economies. In a hyper-connected always-on world, they have a kind of fusty “past-the-expiration-date” sort of feel to them. In Continue reading Capital Thinking

Toxic Secrecy

Usually it’s a good idea to keep your mouth shut. But not always.

Last year, Brian Dunn, the newly installed CEO of Best Buy, developed a close personal relationship with a junior female worker. This kind of thing is bad for company morale. Among other things, it’s hard to oversee someone who is chummy with the new Chief. The Chairman and founder, Richard Schulze, was informed about it and confronted Mr. Dunn. When Dunn denied the allegations, Schulze let the matter drop.

That was a problem. Continue reading Toxic Secrecy

Losing A Bundle

What are some other bundled products?

Yesterday I discussed how part of Apple’s success comes from the iTunes Store, where they unbundled the individual songs on an album. You can still purchase an album, but now you don’t have to. With individual songs costing 99 cents, piracy is less of an issue: most people feel they can afford the price.

Bundled products load unneeded products in with desired ones, simplifying the marketing and enabling the seller to earn a wider margin. But if the same goods or services can be delivered in an unbundled manner, they can be sold more efficiently. So what are some bundled products that we see?

You don’t have to look far—just think about the most inefficient services we receive. Continue reading Losing A Bundle