This Spring, I had the chance to sit down with Scott Malpass, Chief Investment Officer of the University of Notre Dame. During our discussion, I asked him a few questions about the Endowment, how it functions, its Socially Responsible Investing (SRI) policies, and its views on divestment strategies with a particular focus on fossil fuel divestment.
1) For the non-business students reading this article, can you briefly describe what an endowment is and how it operates?
An endowment generally starts with a donation from an alumnus or other benefactor for a specified purpose that we are legally obligated to honor, say to endow faculty chairs in a particular academic department or discipline. The gift itself is not intended to be spent, but the investment growth and income funds those faculty positions. That way, the endowment creates a source of funding for the stated purpose for generations, assuming we generate good investment returns. Another way to think of it is that if the gift hadn’t been made or if we are not successful with our investments, then some other source of funds would be needed to fund those positions, likely additional tuition. So endowments are a critical funding source particularly for private schools that do not receive governmental appropriations like state schools. When we talk about the Notre Dame Endowment, or any school’s endowment, we are actually referring to the aggregation of thousands of gifts like this for various purposes.
2) What purposes does the Endowment Fund serve and how is it spent?
The largest purpose is financial aid, both undergraduate aid and graduate fellowships, which comprises one-third of the spending. Another almost 30 percent funds endowed faculty chairs and academic programs. The balance goes to numerous other aspects of the University’s mission like library collections, athletics, public service, various student activities and clubs, and so forth.
3) Briefly describe the investment philosophy and approach of the Notre Dame Endowment:
Our long-standing investment philosophy is anchored in three core principles: diversification and balance, partnering with the highest quality managers from around the world in each asset class, and strong liquidity management to take advantage of emerging opportunities.
The Endowment is invested in a global, multi-asset class portfolio, with a heavy commitment to equity and equity-like investments for long-term growth so that we can achieve high real returns in excess of inflation to support students and faculty.
We are fundamental investors, partnering with investment managers that seek to invest in assets that offer strong long term cash flows priced at attractive levels and well-managed companies with strong business models. We eschew shorter term trading strategies and market timing.
We are long-term investors. The Endowment has a perpetual life, so we can be extremely patient and disciplined. The ability to look past short term volatility and build deep partnerships with the very best investors globally over years, and often decades, has a powerful compounding effect.
4) What are the selection criteria for investment partners and how do you ensure they are continually meeting those standards?
There are three essential criteria for every investment partnership. First, every partner must have a demonstrated edge as an investor that translates into a clear record of excellence. Second, all members of their firm must exercise the highest standards of personal and professional integrity. Finally, we look for investment firms whose organizational cultures produce a strict adherence to a set of core values, which reinforce excellence and integrity and place the ideal of stewardship at the center of every action or decision.
As we make relatively few new investments in a given year, our team’s primary task day to day is the shepherding and monitoring of our current partnerships in order to ensure that our thesis remains intact for each partner and that they are achieving the very high standards to which we hold them. This includes both qualitative and quantitative analysis complemented by frequent in- person interaction and evaluation.
5) The University has been a leader in socially responsible investing among the major university endowment funds for years. Please describe the SRI program and how Catholic Social Teaching is incorporated into the program.
Yes, we’ve applied SRI criteria for decades. We have a dual mandate, the responsibilities to ensure an investment return that supports the University’s mission, and to act in accord with Church teachings. We follow the investment guidelines of the United States Conference of Catholic Bishops, which set forth a number of issues of concern, most prominently sanctity of human life issues. As a result, we restrict investment in numerous specific companies. To identify these companies, we purchase research from an independent party with expertise in this area, and of course we supplement that with our own research and knowledge of the markets and individual companies. It’s the responsibility of everyone on our investment team to be vigilant about these issues and we have a couple people who are specifically charged with monitoring companies and changes like corporate mergers that can result in additional companies being blocked. We assure that our external investment managers are informed of our concerns and they are given our restricted list and changes to the list, and we monitor our accounts daily to assure compliance with these restrictions. And we simply do not invest in areas like certain biotech funds where we think there is a probability of involvement in something like embryonic stem cell research for example. Even with all these restrictions, our investment performance has been very strong so we think we are meeting our dual mandate.
6) What is your view on divestment strategies in general and fossil fuels in particular?
These are the core questions facing socially conscious investors today, and it’s very complex with legitimate competing views so let me go into some detail. In terms of changing corporate behavior or affecting the price of a stock, there is no evidence that divestment affects either. Intuitively, it’s not likely to have much of an effect because selling out of a company’s stock simply means someone else is buying it. So you’d need a really broad consensus for divestment of that stock, which rarely occurs. Putting all that aside though, there are many companies that we won’t own purely for moral reasons, and we follow the USCCB guidelines as I mentioned. So we know for example that Catholics are in the minority in terms of our concerns relative to abortion, contraception, and embryonic stem cell research, and we also know others will buy shares of companies involved in these activities. And keep in mind that many of these companies, often in the pharmaceutical and health care industries, also do a lot of good in the world. But the theory is that if other investors agreed with us just hypothetically and no one bought these shares, then we could change behavior and effectively bring an end to these activities that we find inherently evil. Now relating that to fossil fuels, it’s more nuanced because everyone should be concerned about the environment, yet all of us are dependent on fossil fuels that still provide much of the world’s energy. Particularly for the poor in the developing world, power is integral to attaining a decent standard of living in terms of basic services like modern health care and sanitation that we take for granted every day, and the loss of power could devastate economies and livelihoods that already are meager by our standards. So until someone cracks the nut on making alternative energy affordable and viable on a large scale, and we are moving in that direction but it will take time, it’s hard to equate fossil fuels to an inherent evil like abortion that as Catholics we’d like to end. It’s important to note that the recent Papal Encyclical, Laudato Si, acknowledges this need for fossil fuels until viable alternatives are developed. In the meantime, the Pope has asked each of us to do what we can to secure a sustainable future, and as you know students and administration are taking that seriously at Notre Dame with many campus environmental initiatives.
7) How much of the endowment is invested in fossil fuels?
The Endowment Fund has a relatively small weighting in fossil fuel investments, approximately 4% of the value of the pool. That includes both public securities and private equity investments in the sector. I should note that as part of our regular SRI policy implementation, we are restricting a number of coal companies already due to concerns over various corporate practices. We also do invest in new technologies in the clean energy space as part of our venture capital portfolio, which is one of the most extensive and successful venture portfolios in the nation.