One comment from Will Slack’s ’11 excellent summary of Morty’s talk on the College’s financial situation deserves a post of its own.

How will this change the endowment management?

Thank goodness for Collete Chilton. Without her, we might be down 40% this year. Hedge funds are not asset boosters; they are compensation schemes (and I have no clue what this means). Williams is buying more commodities, which are not hedges in bad times. However, we’re still being conscientious. Williams had the chance to buy into a timber thing, and chose not to (Killing the Amazon, etc.), forgoing real profits. It’s not only how you spend the money, but how you raise it..

Let’s unpack these items.

1) I love the moral preening. Williams did not go for the Amazon timber deal so this means we have a conscious. Hah! Does Morty not notice that we have five percent of the endowment in emerging market equities and, most likely, some of those investments are in Brazilian companies? And not just warm and fuzzy Brazilian companies that sell native-made tchotchkes, but the sort of companies that are chopping up all those trees in the Amazon? Of course Morty (like me) does not know anything about the specific companies that the College’s managers invest in, but unless Williams has placed specific restrictions on its managers (unlikely), you can be sure that we have investments in unsavory companies around the world. Not investing directly in some Amazonian timber does not mean that we aren’t profiting from logging and other depredations that Williams People Do Not Like. Recall the similar preening over Sudan divestment.

2) With regard to “compensation schemes,” Morty is probably referring to the fact that hedge funds generally charge much higher fees than traditional asset managers. (The College has 10% of its endowment in “Absolute Return” strategies, almost all of it in hedge funds. The compensation scheme for all the of the College’s Private Equity (9%) or Venture Capital (6%) allocations are almost certainly similar.) These fees generally have two parts: a management fee (1%-2%), which is just like the fee that you pay on your mutual fund, and a performance fee (around 20%), which is only paid on the profits over a specific benchmark. People who argue that hedge funds are “compensation schemes” generally believe that those fees are too high, that hedge funds don’t perform nearly well enough to justify taking such a large portion of the profits and that much of their success is a bull market phenomenon. The same arguments are made against private equity and venture capital.

But, guess what! Morty can solve this “problem” easily. Just pull all the endowment money out of hedge funds, private equity and venture capital. Problem solved! But recall (pdf) how trustee Dave Coolidge ’65 describe things last year.

We set our allocation targets for each asset class annually and over the last few years have increased our allocation to hedge funds, real estate, and international equities, while reducing our allocation to domestic equities and bonds. The Investment Committee recently completed a thorough review of the asset allocation policy for the endowment. The Committee adopted a revised policy that will continue to provide an appropriate return for the College with less risk by diversifying into more asset classes. Figure 3 shows our summary asset allocation policy as of July 1, 2007.

So the College, just last year, decided to add more money to hedge funds, organizations that Morty now describes as little more than “compensation schemes.” Did Morty miss that meeting? Has recent experience caused him to change his mind? Will he be proposing that the College decrease the percentage of the endowment dedicated to hedge funds in the future?

I doubt it. I think that this was Morty as wise guy rather than wise man (to steal Mark Taylor’s put down), Morty playing to the crowd and criticizing hedge fund managers even though he (and Williams) remain eager clients.

3) Is it really true that, without Collete Chilton, the Williams endowment would be down 40%? No. That’s absurd. Morty can only get away with howlers like this because there is no one in his audience knowledgeable enough (and willing) to call him out. I doubt that this talk impresses members of the Investment Committee. Some of whom, I have heard, are not Chilton’s biggest fans.

How can I be so sure that Morty is exaggerating Chilton’s contribution? Mainly because she has not been in her job long enough to make major changes in either the College’s asset allocation or in its manager selection. Recall that she started work in the fall of 2006. The College’s asset allocation policy was either already implemented or well on its way to implementation. Might Chilton have had an impact on the margin? Sure. But the College’s endowment looks more or less like it would have even if she had not been hired because it looks more or less like it has for a decade. (More on this latter.)

Leaving aside asset allocation, Chilton has not had time to significantly change many of the specific managers that Williams has hired within the different asset categories. You really think that, first day on the job, she fired all the College’s old managers and hired a bunch of new ones?

Again, Morty is 95% a straight-shooter, more honest and direct than the vast majority of college presidents. Moreover, every president needs to hedge a bit, praise in public while criticizing in private. But ridiculous claims about Chilton’s contributions are not helpful. They cause financially sophisticated alumni to doubt everything else that Morty has to say, to wonder if something else is going on, to worry that Morty is too-invested in his let’s-copy-Yale-and-hire-a-Swensen-clone plan to realize that the whole scheme is a mistake.

I was talking with a very rich, plugged-in alum a few weeks ago, someone who can get a meeting with Chilton (or Morty) whenever he feels like it. After talking with Chilton about the endowment, his first reaction was, “What is she hiding?” After further discussion, his opinion is “Don’t expect me to make a big donation for a major reunion if you have some idiot managing the endowment.”

Those are paraphrases. Although I have a reputation as a Chilton-critic, I was truly surprised at the depth of this alum’s dissatisfaction. Perhaps he is an outlier. Perhaps all the members of the Investment Committee are, with Morty, thanking goodness that Collette Chilton is managing the Williams endowment.

My position is the same as always: Williams should close the Boston investment office. It is too expensive and serves no necessary purpose. No one, least of all Chilton, should be fired. They should all have the option of moving to Williamstown. With luck, most of them won’t.

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