The findings of a report filed by the President’s Committee on Investment Policies, Structures, Strategies and Execution (PCI) on the governance structure of the University of Toronto Asset Management Corporation (UTAM) in December of 2009 detail a long list of recommendations which, for a time, promised to be a wise step in calibrating the university’s investment strategy. However, despite then–U of T president David Naylor’s acknowledgement and selective endorsement of these recommendations later that year, little of substance has been accomplished towards enhancing administrative oversight of UTAM and, to that end, ensuring the sustained financial security of the university.
In an article published in the news section of The Varsity last week, the ongoing controversy generated by UTAM’s continued use of active management strategies in running U of T’s endowment and pension funds was laid bare. UTAM has not shifted its focus from riskier actively managed investments to the chagrin of the body’s stakeholders, particularly the University of Toronto Faculty Association (UTFA), whose pensions are managed by UTAM.
Up until roughly a decade ago, the responsibility of managing U of T’s endowment and pension funds lay with the university’s Treasury Department, which was supervised by a volunteer committee. At the beginning of the 2000s, U of T’s administration opted to establish UTAM as a replacement in hopes of achieving the investment success of several reputable universities in the United States. Yale and Harvard, for instance, each avail themselves of professionally managed investment offices to oversee their funds.
Despite a rocky first decade, UTAM has manifestly enjoyed some success — U of T’s main investment portfolios outperformed benchmarks by about 10 per cent last year. UTAM’s 2013 Annual Report states that the university looks for a four per cent rate of returns on its investments once inflation and costs have been factored in over a ten year period. “That’s what we measure ourselves against. If I can’t outperform that, after all costs, then we shouldn’t be doing active management, or we have the wrong people,” UTAM president and CEO William Moriarty said in an interview with The Varsity last March.
While the university is progressively recovering from the losses incurred during the 2008 financial crisis, which amounted to $1.5 billion in investments, it is imperative that U of T’s administration revisits the recommendations of the 2009 PCI report and establishes a stricter governance policy to manage UTAM in light of the recent concerns over aggressive investment strategy. Moriarty and UTAM insist that active management of the institution’s endowment and pension funds is appropriate so long as they continue to surpass profit targets, but they appear to have not taken the lessons of 2008 to heart.
One of UTAM’s largest stakeholders is the UTFA, which represents faculty members and librarians across U of T’s three main campuses, as well as at other federated universities. Included in the funds managed by UTAM are those same faculty and librarian’s pension funds, which constitute $3.2 billion in assets.
The lion’s share of criticism leveled against UTAM has come from UTFA and, particularly, former UTFA president George Luste. Luste has voiced opposition to UTAM’s use of complex hedge funds, which pool capital from a number of investors and wager securities, bonds, and other sophisticated financial instruments. “Hedge funds cannot guarantee returns and are like buying a lotto ticket and hoping to win. But someone loses money always, and, really, how many winners do we have? In such investments, the only people that make money are the managers,” Luste said in an interview with The Varsity last week. Indeed, UTAM pays out over $14 million annually to fund managers. Moriarty is the fourth-highest paid public employee in the province, earning $772,547 last year — more than the president of U of T.
This issue does not end, however, as a disagreement between pensioners and the university’s corporate administration. U of T students should take note as well, as much of the funding for student organizations, including newspapers, clubs, student governance bodies, and more, is distributed through the endowment. U of T’s Boundless campaign, a fundraising initiative launched in 2011, lists among its top priorities “[enhancing] this vibrant environment and strengthen[ing] one of the most rewarding student experiences in Canada.” Maintaining and improving the quality of the student experience are inextricably linked to the security of the endowment.
The administration and U of T community cannot idly accept the delay in implementing strong governance reform of UTAM. The corporation is in good hands and health for now, but it is crucial that stopgaps be enforced to compensate for the inherent volatility of the market and the relative risk associated with the university’s current investment strategies.
Betting on the pensions of U of T staff and the institution’s endowment exposes every stakeholder in the community to unnecessary risk. U of T cannot thrive in the long-term when the individual financial security of its constituents, especially our instructors and staff, remains tied to unpredictable and complex investment strategies.
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