Universities have become too dependent on the stock market, says Canadian Auto Workers chief economist Jim Stanford.
Jim Stanford
“Universities have gone along with the trend towards relying on the stock market for directional funding and the economic base of what they do,” says Stanford, invited to speak by the University of Western Ontario Staff Association.
Endowments at Canadian universities are down substantially – closing in on $11 billion, he says. Western is projecting an expected investment income revenue loss of $46.25 million over the last three years of its four-year plan from non-endowed investments.
Reliance on corporate and individual donors is “creating a set of risks and compromises for universities,” Stanford says, first because they pursue private money and second by investing in the stock market.
Vice-President (Resources and Operations) Gitta Kulczycki says the university invests endowed funds and a portion of non-endowed funds in a mix of assets in a long-term portfolio including 60 per cent equities, 35 per cent fixed income, and five per cent alternative investments.
“Endowment funds are created to provide a perpetual income stream, and we have the same intention with that portion of non-endowed funds that we put into the long-term portfolio,” she says.
In the past 85 years she says Canadian equities would have averaged 9.7 per cent annually, compared to long-term government bonds at 3.5 per cent.
“Our intention is to generate maximum returns with a reasonable amount of risk, knowing that we have a very long time horizon and that there will be market downturns from time to time.”
Kulczycki says investing in equities returned $45 million from the non-endowed long-term portfolio over the past 20 years, compared to what would have been earned in 30-day treasury bills.
Still, the downturn has helped the university refine how it spends stock market returns.
“What the recent market downturn has reinforced is that returns on non-endowed funds in the long-term portfolio are better directed to one-time expenditures versus ongoing costs,” says Kulczycki.
Stanford was critical of universities relying on investment income, arguing they should not have to depend on whether “financial speculators are having a good day or not.”
Stanford says members of society must ask how much they want to depend on financial markets for the economic and social future of important institutions.
In the context of recent developments, Kulczycki says the university will review how it invests funds with the Investment Committee.
“We do examine our policy and strategies regularly, and it is appropriate that we do so again in the context of the recent extraordinary global market developments.”
Stanford is urging workers to push back and promote economic progress that depends on doing more work, generating more productivity and less on a ‘buy low, sell high’ outlook he says has dominated the last quarter century.
“I think socially we should make much more logical, more secure and cost effective choices, which is simply to say we need these universities and the stuff they do,” he says.