The Penn State Endowment

What good things could Penn State do with an extra $1.2 Billion?

Over the last few years, the fees paid out to Penn State’s Investment Advisers have increased from approximately $11 Million per year, to nearly $75 Million per year.

It is not unusual, in fact it is quite common, for large investment accounts to contract with Investment Advisors to oversee the management of those investments. In doing so, the Advisors are typically paid an annual fee, equal to some percentage of the value of the accounts they manage. The guidelines established by the Penn State Investment Management Group indicate that management fees should be limited to a MAXIMUM of 75 Basis Points. A “Basis Point” is a management term, meaning 1/100th of 1%. So 75 Basis Points is equal to 3/4 of 1% – the maximum fee called for in the guidelines. 75 Basis Points equates to $7.5 Million dollars of fees, per $1 Billion of investments managed. 75 Basis Points, in that industry, is considered a relatively large – but not obscene – fee for accounts of that size.

Prior to 2016, Penn State’s Endowment fees averaged 73 Basis Points per year, just under the guideline maximum. But then something changed – drastically. That drastic change coincided with Ira Lubert’s ascension to position of Chairman of the Penn State Board of Trustees.

Last year, the management fees for Penn State’s endowment were just over $72 Million, on a total of $3.14 Billion of endowment funds – a fee of 230 Basis Points, over three times the maximum called for in Penn State’s guidelines. This is the continuation of a dramatic trend with regard to the Penn State Endowment, as illustrated below:

Penn State Endowment: Year by Year Financials from IRS Form 990

Where do all of these Penn State resources go?  Funds that should be paying for scholarships, research, academics, etc.
These dollars go to “Investment Advisors”. We don’t know exactly who any of them are – or how much each receives. The specific beneficiaries of this Penn State largess are selected and approved by members of the Penn State Administration and Board, but who they send those funds to is treated as confidential and privileged. Why?

We can only know how much is being spent by examining the tax returns that the IRS requires Penn State to file – and the requirement that those returns are made public. And, even then, the figures regarding the fees paid out of the endowment are not necessarily easy to find, as they come from the IRS Form 990, Schedule D, Part V – which the University is required to file with the IRS each year (a copy of that form, from 2018, is attached at the bottom of this post).

Even more disconcerting than the huge distributions of Penn State Endowment funds to these Wall Street firms, is the realization of what Penn State gets in return.
The payments, of course, are intended as compensation for these advisors – who are then charged with providing expert stewardship of Penn State investment funds. So, what have we received?

As seen in the spreadsheet included earlier, thanks to the services of Penn State’s investment advisors, Penn State’s endowment has grown to be worth $3.35 Billion. Is that good? Is that “expert”? Is that worthy of gigantically over-sized fees?
If, for example, rather than availing itself of these services, Penn State had simply dropped the endowment funds into an S&P 500 Index Fund – AND paid out the maximum fees of 75 basis points – how much would Penn State have suffered?

As we can see in the spreadsheet below, the Penn State endowment would now be worth $4.6 Billion So the services of Penn State’s advisors not only came with a huge price tag, but they also cost Penn State well over $1.2 Billion that they could have had by simply dropping the funds into an unmanaged account (and we should expect to be able to do significantly better than an “unmanaged account” – with even marginally competent management). Penn State also would have had fewer years with negative investment returns, and less volatility from year to year – all of which are “good things”.


So, that leaves us with two issues:

1) Why is so much being paid to Wall Street advisors (and who, exactly, is receiving those checks)? And why did those payments increase so dramatically immediately after Ira Lubert and Mark Dambly took control of the Penn State Board?
2) Why are we paying so dearly for performance that is dramatically worse than what we could get “for free”?

*  PSU Tax IRS Tax Filings – Form 990 for 2018.
Including required disclosure of Endowment Investment Management Fees:

The figures regarding the fees paid out of the endowment are not necessarily easy to find, as they come from the IRS Form 990, Schedule D, Part V – which the University is required to file with the IRS each year (see below for an example).

endow 990

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