This is the second of a two part question-and-answer session.
This is the second half of a question-and-answer session conducted with President Christina Paxson P’19 following the divestment referendum. In addition to her thoughts on the politics and policy involved with divestment and the referendum, Paxson also expressed concerns about the limitations, practicalities and function of divestment from a financial and operational perspective. On March 18, the Investment Office contributed an op-ed to The Herald describing its policies and procedures on investment and divestment.
Who has a say in how the University’s money is invested?
So, we have a professional investment office, and they are responsible for selecting fund managers and assessing whether to move in or out of positions. There’s an investment committee of the Corporation that’s responsible for oversight of that office. … Endowment management is one of the most important responsibilities of the Corporation, because their duty, ultimately, is to (ensure) the long-run financial security of Brown.
Why shouldn’t students, faculty or alumni have a say in how Brown’s money is invested?
Because we have a responsibility to get the best risk-adjusted returns possible, and we need professionals doing this.
What are the logistical difficulties of divestment? What are the costs?
The costs of divestment would depend a lot on the specifics of the situation. In general, we can handle narrowly defined divestment actions where it’s one or two or three companies. … One of the issues that I had with the Brown Divest campaign was that … the list of criteria was very broad. It could have expanded to many companies. And if you look at the companies that are (listed), these are major corporations that are in every index fund and almost any stock portfolio that you could think of. …
Like most universities, we do very little direct investing. … Right now, direct holdings are less than five percent of the endowment. We’re not choosing stocks (or) companies to invest in. We’re choosing fund managers, who are making investment decisions. … If we went to those (managers) and we said, ‘we’d love to invest with you, but you have to promise not to invest in the following six major companies, and by the way, we might be adding ten or twelve more names,’ the response would be, ‘we don’t really need your business.’ And we would have a hard time managing the endowment in a way that’s financially responsible.
Is the University currently aware of what companies it is invested in? What sort of system does it have for tracking and monitoring our investments?
There is a very sophisticated system in place for tracking and monitoring (the University’s investments). … (The Investment Office’s) job is to keep track of the performance of those investments. …(But) we sign (non-disclosure agreements) with our fund managers. Even if they tell us what they’re investing in, we’re not allowed to tell others. … They view that as their intellectual property. This is their business, trying to figure out what to invest in, and they’re not going to give it away for free to the rest of the world.
But the terms of these agreements between the University and its fund managers say that the University can still tell people what it has divested from?
Yes, because … we have many fund managers. So, if we say we’re not invested in tobacco, we’re not talking about the positions of any of our individual fund managers. I guess you could infer from that that none of them own tobacco. But that wouldn’t be a violation of the NDA.
If you were to release the University’s investment portfolio as a whole without specifying which fund manager holds what stock, would that be a violation of the NDA?
I think it would be very hard to do that because things change very rapidly.
I think the issue for Brown Divest is that it’s not about which fund manager holds what stock. It’s about what, with all of these fund managers, is the University invested in?
Well, I can assure you right now, without even looking at what’s in our funds, that we are invested in all of the companies that (Brown Divest) listed with the exception of Safariland Group, which is not publicly traded. Because they are major U.S. corporations. …We can divest if we want to, (but) the larger the number of instruments that we need to get out of, the costlier it’s going to be for the University. Also, you worry that you’re going to undermine confidence in the endowment if people think that it’s susceptible to veering away from being something that is managed to promote high returns.
Does the University work with — or has it considered working with — funds that offer environmental, social and corporate governance investment options?
A lot of fund managers are coming out with ESG, social-choice-type funds, and those get considered and vetted like other funds. I don’t know where we are right now, but sure, that’s something that we’re very much open to. When our investment office is doing due diligence on a fund manager, they ask about their long-run returns and they look at the stability of the leadership team, all the things that you would normally do to assess the expected future returns of investment. … We want to invest in fund managers who have integrity and whose values reflect our values. So it’s not just a purely cut-and-dry financial decision.
This interview has been edited for length and clarity. This article appeared in print under the headline "Paxson Q&A Part Two: Paxson talks costs of divestment."