America’s foundations spend many millions of dollars every year on investment advice. What do they get in return?
You read that right: Money that could be spent on charitable programs — to alleviate global poverty, help cure disease, improve education, support research or promote the arts —instead flows into the pockets of well-to-do investment advisors and asset managers who, as a group, generate returns that are below average.
This is redistribution in the wrong direction, and why it hasn’t attracted more attention or debate is a mystery.
The latest evidence that foundation executives make dumb investment decisions arrived recently with the news that two energy funds managed by a Houston-based private equity firm called EnerVest are on the verge of going bust. Once worth $2 billion, the funds will leave investors “with, at most, pennies for every dollar they invested,” the Wall Street Journal reports [paywall].
That said, the debate between active and passive asset managers remains unsettled. While index funds have outperformed actively-managed portfolios over the last decade, Cambridge Associates, a big investment firm that builds customized portfolios for institutional investors and private clients, published a study last spring saying that this past decade is an anomaly.
“We continue to find investments in private equity and hedge funds that we believe have an ability to add value to portfolios over the long term.”
Portfolio managers are also sure to argue that their expertise and connections enable them to beat market indices.
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