A Deeper look at the Penn State Endowment

Earlier – we discussed the bewildering increases to the fees paid to “Investment Managers” of the Penn State Endowment:


This BLOG will take a deeper dive into making sure we all know how the “Penn State Endowment” is constructed.

And we will unravel some of the more disconcerting aspects of the Endowment and its management.

Aspects Including:

  • Excessive Fees – which are not only bewilderingly high, but also violate Penn State’s own mandates
  • Shrinking distributions – which minimize the benefits to Penn State’s Mission of Education and Research
  • Over $1,400,000,000 (One point Four Billion Dollars) in lost gains due to underperformance of the investment managers
  • And one Big Lie, perpetrated by Penn State’s Trustees and Administration.

1) A Brief Primer:  What is the “Penn State Endowment”?   And how do “Endowments” operate?

Endowments, in broad terms, are simply financial accounts… piles of money…. that are invested, with the goal of using the earnings from those accounts to fund specific needs.
In addition, some of the earnings are generally plowed back into the endowment account, with the idea of having the endowment grow over time.

In the case of the Penn State Endowment (or the endowments for other Universities) the dollars that create the endowment are generally gifts from donors.

Each University’s endowment is invested into various financial markets (stocks, bonds, real estate, etc).

Typical University Endowments then:

1 – Grow as new donations are received into the account
2 – Grow (or shrink) as those investment accounts either increase or decrease in value
3 – Shrink as funds are spent from the endowment – to pay for things like Faculty Salaries for an “Endowed Chair”, or to provide scholarship funds for worthy Students, etc
4 – Shrink as fees are paid to the various “Investment Managers” of the endowment.

And each year, depending on the values of those four parameters, the value of the Endowment will either increase or decrease.

Generally, endowments are managed whereby the distributions from the endowment are expected to be less than the additions – – – and the endowment will grow over time.

In the case of the Penn State endowment, the guidelines set a target of 4 1/2% of the endowment being spent each year – to fund various missions…. and 3/4 of 1% of the endowment funds being used to pay the Investment Managers…. for a total distribution of 5 1/4%.

Generally, endowments SHOULD grow fairly substantially over time – since long-term investment performances will almost always exceed the targeted distribution rates.

2) Governance of the Penn State Endowment

Spoiler:  It is a Mess

The Penn State Endowment – currently valued at approximately $3.5 – 4 Billion – is governed through three tiers of Fiduciaries:

A) The Board of Trustees has ultimate responsibility for the endowment’s governance.

The Board established the “Finance Subcommittee” to provide fiduciary oversight and control of the Endowment funds.

That committee is composed of:
Mark Dambly
and three Trustees appointed by Mark Dambly…..
Mary Schneider  Barb Doran, and Alex Hartzler

B) The Penn State Investment Council is responsible for the operational and managerial aspects of the endowment

The composition of the Investment Council includes two Penn State Administrators – the Vice President of Finance, and the CEO of the Office of Investment Management.
In addition, there are anywhere from 5 to 9 members appointed by the PSU Board of Trustees.

The current appointees (all members of private investment management firms) are:

Alex Hartzler, WCI Partners, L.P. in Harrisburg, PA

Hartzler, as we saw above, is also a member of the Penn State Board of Directors, and appointed by Dambly to the Board’s Finance Subcommittee

David Rogers, JD Capital Management in Greenwich, CT
Blake Gall, MicroPlusPlus Investment Management in Boalsburg, PA)
Edward Hintz, Jr., Hintz Capital Management, Inc. in Morristown, NJ

Hintz is a past member of the Board of Trustees, and currently an Emeriti Trustee of the Board

Joseph Markovich, J.P. Morgan Private Bank in New York, NY
Carmen Gigliotti, DuPont Capital Management in Wilmington, DE
Colleen Ostrowski, Visa in San Francisco, CA
James Brandau, Brown Brothers Harriman & Co in Philadelphia, PA


C) The Investment Advisers – selected by the Board and the Investment Council – determine the specific investments that are bought and sold with the Endowment funds.

The specific Investment Managers who invest – and profit from – the PSU Endowment funds is not made publicly available.

We do not know which Investment Managers – including members of the Investment Council and/or their “Friends” – are profiting from their relationships.

Fees paid to Investment Advisers:

As was discussed in the earlier BLOG:


the fees paid to Investment Advisers of the Penn State Endowment have been increasing at an absolutely extraordinary rate.

We do not know where those $$$ go… but we do know that they are well in excess of the parameters set by the committee (which, as discussed earlier, are supposed to be limited to no more than 3/4 of 1% of the endowment value).

3) Performance of the Endowment 

Spoiler: For all the money paid to Investment Advisers, their “performance” cost Penn State over $1.4 Billion dollars in lost profits.

The performance of the Penn State endowment – over the most recent 10 years of publicly available information – are contained in the table below.

The table lists the Endowment Value at the beginning of each year – along with the level of donations received, the gain(loss) of the investments, the expenditures from the endowment, and the fees paid to the investment advisers:

endow fees

Over the most recent 10 years in Penn State’s public reports:

The endowment grew from $1.5 Billion, to $3.1 Billion.

During that time, there were:

$1.2 Billion of donations added to the endowment
$0.9 Billion of distributions from the Endowment (to fund University missions),
$228 Million of Investment Adviser fees paid out from the Endowment to the Investment Advisers.
$1.6 Billion of investment earnings on the endowment accounts.

So, was that performance “good”?

As stated, the endowment, over the ten-year period, realized $1.6 Billion of investment gains.   To judge performance, one would have to compare how the Endowment performed relative to the performance of the investment markets.

One common comparison would be to look at the performance of the S&P 500 (a diversified stock portfolio) over that same time period.

One would typically expect the Investment Managers to achieve a return similar to, and hopefully a bit in excess of, what one could have achieved by simply “investing the funds blindly into the market”

So, how did they do?

The table below lists what WOULD HAVE happened had the Endowment simply been invested in the S&P 500:

Over the most recent 10 years – if the endowment had simply been placed in the S&P 500:

endow growth 2018

So, if over those ten years, the Endowment funds had simply been blindly placed into the markets – rather than entrusted to Penn State’s chosen Investment Advisers – the results would have been:

$1.2 Billion of donations added to the endowment
$0.9 Billion of distributions from the Endowment (to fund University missions),
$129 Million of Investment Adviser fees paid out from the Endowment to the Investment Advisers. (A savings of $99 Million)
$2.9 Billion – NOT $1.6 Billion – of investment earnings on the endowment accounts.

The endowment would have grown from $1.5 Billion, to $4.5 Billion (not the $3.1 Billion that our highly-paid Advisers achieved).

All of those management fees paid to Penn State’s Investment Advisers bought us the “benefit” of making $1,400,000,000 (1.4 Billion) LESS than a blind investment into the markets would have done.

Money well spent?

4) Distributions from the Endowment

Spoiler:  Support for Penn State’s missions of Education and Research has been dwindling.

As mentioned earlier, the stated target for distributions from the Endowment – funds used to support Penn State’s missions or education and research – is set at 4 1/2% or more.

What has Penn State Administration been doing?

Once again, we can go to the tax filing data:
Endowment Distributions

Penn State had, historically made greater use of the endowment to support Education and Research – including a 5.56% distribution from the Endowment in 2008.

Since then, the distribution rates have dropped significantly – well below the target of 4.5%+    The average over the last five years has been just 3.73%.

On the other hand, over that same time period, the fees going to the Investment Advisers have shot through the roof.
Odd… is it not?

Often times, when the concept of using “Endowment Funds” to serve some Educational or Research purpose, the response from the Trustees is:

“We’d love to, but we can’t, because the Endowment Funds have strict specifications on how they can be used – and we can’t touch them for any other purpose.”

That is a response that is – as we shall see – a huge lie.

5) The “Untouchable” fallacy.

Spoiler:  The “Big Lie”

Penn State’s Endowment currently has a value of well over $3 Billion (as of 2019).

Any time an issue is raised with respect to using more of those funds to Control Tuition, Provide Scholarships, Attract and Retain Quality Faculty, etc, the standard Trustee and Administration response is:

“We’d love to, but we can’t, because the Endowment Funds have strict specifications on how they can be used – and we can’t touch them for any other purpose.”

At times, Donors CAN and DO make a contributions for a specific cause.

For example, a Donor may give $5,000,000 – with the restriction that the earnings from those funds be used to underwrite the cost of an “Endowed Chair” – for example, to pay the salary of a Professor in the College of Engineering – or some such request.

In the case of Penn State, the largest restricted donation came in 2011/12 – when Terry and Kim Pegula made gifts (totaling approximately $100 Million) with the restriction that those funds go towards building an Ice Hockey arena, and providing funds for the expenses of running the Men’s and Women’s Ice Hockey programs.

Note: To the best of my knowledge, NO donor has ever given to Penn State with the stipulation that their funds be used to pay bewilderingly high fees to Investment Advisers – particular to Advisers who’s performance is atrocious.

In any event, those funds – restricted funds – make up a small part of the total contributions to the endowment.

We can go to Penn State’s required Federal Filings to get that data.
An example of one of these filings (from 2016) is included below:

Penn State Federal Audit Report

In this example (for 2016) we see that Penn State received a total of $78.3 Million in donations, of which $11.5 Million was “restricted”, and $66.8 Million was not.

Further, if we go through the filings for each year, we can compile the data listed in the table below – and see how much of the endowment is indeed restricted:

PSU Endowment Gifts

As we can see from the data – despite the protestations of the Board and Administration – the overwhelming majority of the endowment funding is NOT restricted.
In fact, approximately 80% of the funds over the last decade are NOT restricted.

Penn State can choose to use the funds to support the missions of the University….. it just chooses not to.

Additional Issues and Detailed Information:

1)   Investment Adviser Fees… and an explanation of “Basis Points”

In the Investment Management industry, fees charged by Advisers are typically expressed as “Basis Points”.

One “Basis Point” = 1/100th of 1%, of the account value.

Advisers are compensated based upon this calculation – for example, an Adviser charging 100 Basis Points would collect an annual fee equal to 1% of the value of the account.

Basis Point fees are higher on smaller accounts, and lower on larger accounts.

If you went to an adviser, and hired them to manage your investments, they would likely charge you a higher fee if your account was worth $100,000, than they would for another client who had a $1,000,000 account.   That is just how the business works.

Advisors also typically charge lower fees for accounts which don’t require as much “effort”, for example, an account invested primarily in US Government Bonds…. and would charge more for an account invested primarily in Foreign Company Stocks.

Typically, for accounts that are primarily Stock (Equity) based – like Penn State’s Endowment:

Fees would be in the 100 Basis Points range for smaller accounts (let’s say a few hundred thousand dollars),
and maybe in the 50 Basis Pont range for accounts of several million dollars,
…… with fees lower, say 25 Basis Points, for very large accounts – in the hundreds of millions or billion dollar range.

Penn State’s endowment guidelines – which we talked about earlier, and haven’t been updated in many years – stipulate that fees should not exceed 75 Basis Points (which is a very high number to begin with).

The table below converts the fees (which we discussed earlier) into the “Basis Points” convention.

What do we see:

endow bp 2018

From 2008 through 2013, as the endowment grows, we see the fees dropping – as would be expected – from 82 Basis Points to 62 Basis Points.

But, from 2013 on – even as the endowment grows – the Basis Points INCREASE from 62 to 101 Basis Points (a 63% Increase in the number of Basis Points charged – when, in any other investment advisory world, those Basis Points should be Decreasing).

AND THEN:   In 2018, those fees – already ridiculously high – more than DOUBLED, to 249 Basis Points (nearly 2 1/2% of the entire endowment value, paid to investment managers in a single year.

This is – to put it mildly – bizarre…. and completely indefensible.

Is NO ONE paying attention?

2) Is there any rationale that might explain, at least in part, the underperformance of the PSU Endowment?

In addition to the atrocious overall performance of the PSU Endowment, lets look at the returns on a year-by-year basis, vs the S&P 500.


Sometimes a lower performance is at least partially “explained” when an account is managed in such a way as to yield stable, predictable returns.

For example, one might be faced with two options:

An account managed to provide long-term growth – of, let’s say 10% per year – but with the caveat that returns will be unpredictable from year-to-year.
In “good” years the account may grow by 30%, but in “bad” years the account may lose 30%.


An account that is managed to provide a lesser growth rate – let’s say 7% per year – but with the expectation that the returns will be more-or-less predictable and stable from year-to-year.

In some situations, a client may be willing to sacrifice long-term growth, in exchange for more consistent year-to-year performance.

Does this explain the underperformance of the PSU Endowment?

The Year by Year investment return on the PSU Endowment vs the S&P 500:

Endowment vs SP Year by Year

Is the Endowment’s underperformance due to sacrificing Growth for Stability? 
NO.   It is not.

The Endowment’s returns underperform because they have achieved something which is very difficult to accomplish – even if you were trying.  Specifically:

The PSU Endowment has underperformed in ALL conditions.
When the markets are “good”, the Endowment underperforms…. when the markets are “bad”, the endowment underperforms.

Through good times and bad, the PSU endowment has – incredibly – underperformed for eight consecutive years.

That is hard to do, and it has cost all of us over $1 Billion.

(Cost “all of us”, except – of course – the Investment Advisers…. who have seen their compensation increase and increase and increase)

3) How did the PSU Auditors, President Barron, and every member of the Board of Trustees miss this one….. $38 Million?

As mentioned earlier, the information on the PSU Endowment is taken from IRS Forms 990, Schedule D, Part V.

These forms – before being submitted to the Federal Department of the Treasury (IRS) – are reviewed and “signed off on” by Penn State’s Auditors (Deloitte), President Barron, and all of the Trustees.

Here is the relevant Form 990 for 2017:

Missing Endowment money

Each year, the Form 990 is completed and submitted.
And, each year, the format is the same:

Beginning Balance
+ Donations + Investment Gains
– Distributions – Adviser Fees =
Ending Balance.

And, each year, the figures on the Form 990 “add up” correctly……. until 2017

From the 2017 Form 990:

Beginning of Year Balance:      $2,596,174,000
+ Contributions of:                     $170,692,988
+ Investment Gains of:              $228,296,630
– Distributions of:                       $105,182,728
– Adviser Fees of:                        $27,469,890

Equals Ending Balance of:      $2,862,511,000

That is what SHOULD be in the Endowment

But the Form 990 says the Ending Balance of the Endowment is:     $2,824,470,630

What happened to the missing $38 Million?

And how did Deloitte, Barron, and every member of the Board sign off on that IRS document?

Should someone notify the IRS?

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