Thread by @terry_renaud

Last wk Yale faculty were briefed by D. Swenson, manager-guru of the endowment. No recording allowed. Amid talk of "investment gods" & "institutional immortality," we learned that this 1974 essay still informs Yale's endowment ethos 1/
jstor.org/stable/1816077

Tobin was an influential neo-Keynesian economist who worked at Yale, advised the US gov't, and modeled economic sustainability. His 1974 essay in AmerEconReview est'd the "Tobin spending rule" balancing endowment distributions bt prior-yr spending & projected market value 2/

The essay begins: "The trustees of an endowed institution are the guardians of the future against the claims of the present. Their task is to preserve equity among generations. The trustees of an endowed university like my own assume the institution to be immortal." 3/

I'll cut to the chase: we're dealing here with a not-so-secular priesthood of the endowment. They devoutly serve the Immortal Institution, and thus must deny the claims of the mortal, i.e., the existing faculty, staff, and students. 4/

That absolute commitment underpins Tobin's spending rule: "Sustainable consumption is [the priesthood's] conception of permanent endowment income. In formal terms, the trustees are supposed to have a zero subjective rate of time preference." = Eternal life 5/

Tobin suggests that the Uni's other income sources might be taken into acct alongside endowment returns, but then: "there are some good reasons why university trustees might choose to stabilize their consumption from endowment alone." = Thou shalt have no other gods before me 6/

Idol #1: income derived from student tuition, based on tuition amt & number of students, which are "endogenous" factors determined by Uni discretion and so cannot be capitalized 7/

Idol #2: gifts or grants for current use, which are too unreliable & fungible for capitalization.

So: "the governing board [should] ignore 'soft' money in calculating permanent income and thus... let total budgets fluctuate as soft money comes and goes." 8/

more on gifts: "Capital gifts can be conveniently regarded as buying into the mutual fund [i.e., the endowment] at the current share value, thus increasing the [number of shares]. However, in the argument below I will take no account of such gifts." = No sale of indulgences? 9/

Endowment Kabbalah

(I haven't been initiated into these mysteries, so I'll move on) 10/

The formula permits a Uni "to consume recurrent capital gains, but to avoid swings of income due to transient fluctuations in securities prices & changes in market discount rates." = Upon this rock I will build my church; and the gates of hell shall not prevail against it 11/

The most devout way is "to estimate a real growth rate for the economy as a whole,... and then to correct it for the deviation of the university's portfolio from an economy-wide cross-section portfolio." = When the perfect comes, the partial will pass away 12/

Let us be guided by the true prophet: "If the portfolio manager is worth his salt and his investment performance is systematically and recurrently superior, it should be reflected in current as well as in future income." 13/

A lost commandment? "A university is interested in the security of its income, not in the stability of the endowment's market value. In choosing investments, portfolio managers should be willing to take considerable risk of capital value for an assured & growing cash yield." 14/

Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt... For where your treasure is, there will your heart be also. /end