“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
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