Q: With such a funding resource at its disposal, I’m sure Brown gets requests to use its finances to support a range of initiatives. Are there limitations to what Brown’s endowment funds can pay for?

Yes, there are limits to how the endowment can be used. It is another common misconception that the endowment is a piggy bank or rainy day fund that Brown can dip into in order to address financial challenges. This is particularly pronounced when there is some kind of emergency — like the pandemic, for example — where sacrifices have to be made and it’s natural to point to this pool of capital and ask “why not use that?”

But the endowment is actually a collection of almost 4,000 individual legal contracts with a specified purpose that is enshrined in their gift agreements. So, for example, an endowment that was created to support research on Alzheimer’s disease has to be used for that purpose. That’s both a sacred trust of accepting that gift and a legally binding requirement. So even if, in 10 or 20 years we keep making progress and effectively cure the disease, that endowed fund  will still be required to contribute its value to research on Alzheimer’s disease. To change the purpose requires assent from the giver of the gift, or their heirs, and absent that permission it requires permission from the Attorney General of Rhode Island.

So while the University can expand the payout in a time of emergency, which it did during the pandemic, the uses of that increased contribution still have to go to the specified purpose.

Q: How are Brown’s investment managers selected?

We set out to build an “all-weather” portfolio that will generate returns in most macroeconomic scenarios. Achieving this goal requires diversification. We research the types of investments we want exposure to and then we seek the most competitively advantaged managers we can find to execute those strategies. We do an enormous amount of due diligence — reference checks, examining managers’ historical track records and countless other quantitative factors — and we spend significant time with the management teams discussing strategy, history, where they learned their craft, what their motivations are, the ability to build a team, their operations, their ESG strategy (Environmental, Social and Governance strategy), and anything else that might be relevant. It’s through these conversations that we come to an understanding of a manager’s values. We aim to choose managers who invest with ethics and integrity.

We approach this as an assessment of a business partnership. A good business partner doesn’t have to conform to a certain, specific profile, but a partnership should be a relationship of cooperation for mutual benefit that is based on trust. Essential for that trust to be established is a high level of integrity and forthrightness.

Q: You mentioned that there is a lot of interest in how Brown invests its endowment. What information can Brown share publicly on the investments it holds?

We consider one of the markers of an excellent investment program to be transparency for stakeholders. Our annual reports detail our asset allocation, insights on our strategy, investment performance and other metrics. We model it on Warren Buffett’s letters to Berkshire Hathaway shareholders by making it comprehensive but written for a broad audience. We also make presentations to Brown students, alumni, staff, faculty — really anybody who has the interest and patience to understand how the endowment is invested.

In terms of the endowment’s direct investments, we file a publicly accessible Form 13F with the U.S. Securities and Exchange Commission on a quarterly basis. We often explain to students and other groups how to access this form, in part to make clear that the endowment does not directly hold shares in the companies that have often been at the center of campus debates.

Of course the majority of the endowment is invested with managers we have hired to invest on Brown’s behalf. We are contractually bound to refrain from disclosing these managers’ identities or the contents of their portfolios, just as they are bound to refrain from disclosing their investors. For an investment manager, the content of their portfolio is really the product they sell. It is the intellectual property of that firm, and if it were widely known in real time, it would become valueless. So confidentiality is a critical and essential requirement.

Q: You mentioned an increased interest in endowments during times of geopolitical conflict, and you also mentioned campus debates. You’re talking about calls to divest the endowment from certain industries or activities — who makes those divestment decisions?

The Investment Office actually does not have a role in deciding whether or not Brown will divest or disassociate from any investment. The Brown Corporation is responsible for a decision to divest the endowment from a particular investment. The first step is that any member of Brown’s community — the estimated 10,000 students, 5,000 faculty and staff, and the 120,000 alumni — can put forth a request to the Advisory Committee on University Resources Management (ACURM) to consider whether there is a social harm that is the result of Brown’s investments. ACURM also weighs what impact such a divestment action would have in alleviating that harm. The ACURM committee, which is made up of  faculty, students, staff and alumni, makes recommendations to the president, who then has discretion to decide whether to bring the issue to the Corporation for a vote. If the Corporation then votes to divest, the Investment Office would take steps to ensure that requirement is followed and monitored.

Q: What is the history of divestment actions at Brown?

A somewhat simplified history of divestment actions at Brown begins with divesting from a group of companies that had high-profile operations in South Africa during the apartheid regime in the 1980s. After the apartheid state fell, Brown rescinded that divestment. In 2004, the Corporation [of Brown University] voted to divest the endowment from direct holdings in companies doing business in Sudan as a result of the genocidal actions in Darfur. And finally, the endowment is also divested from direct holdings in companies that engage in the manufacture of tobacco products. I say this a simplified history, because in each of these cases, there is significant background and varying context related to how state, national and international governing bodies were dealing with the social and political issues that factored into divestment.

Critical to understanding these prior divestment actions is the fact that they pertain to Brown’s direct investments only, meaning stocks that are directly held by Brown and can be seen on our 13F filings with the SEC.

Q: What about divestments from oil and gas? Or weapons manufacturers?

Brown is not technically divested from oil and gas. However, by 2019 the endowment had sold out of effectively all of its interest in fossil fuel energy strategies. The decision to do so was an investment decision, not an ethically minded divestment decision. The endowment had, historically, invested in long-life vehicles of 10 years or more that would seek to invest in fossil fuel extraction. In conducting research on the energy transition away from fossil fuels, the Investment Office concluded that there was substantial risk of “stranded assets,” which would have significant negative financial impact, in these long-life vehicles.

One point that is important to understand about Brown’s prior investments in oil and gas is that the endowment had dedicated strategies focused on this area. As we moved away from that strategy, we ceased making those investments and sold the investments that we had. But when it comes to defense contractors or weapons manufacturers, the endowment has nothing in our portfolio that looks like this — it’s simply not a strategy we have ever seen fit to pursue.

Q: How does the Investment Office know what companies its managers are invested in? Is it certain that the University has no exposure in areas where it has formally divested — tobacco, for example?

When we hire a manager, we generally grant that manager discretion to make investments as they see fit. We then negotiate for detailed reporting that will allow us to monitor that they are, in fact, pursuing the strategy we agreed upon. For investment managers, they are in the information business. If someone else knows exactly what they are buying, then their intellectual property has been impinged upon and they will not be as successful making future investments. As a result, often what we see are the investments they are making after the fact.

Our divestment from tobacco applies only to Brown’s direct investments, not to the investments in the portfolios of managers. This is the case for all divestment. So it is, in fact, almost certain that Brown has some low-level, incidental exposure to tobacco manufacturers. The S&P 500 index, which is the most widely owned investment product in the world, includes companies that manufacture tobacco. So if Brown were to invest in an S&P 500 index fund, for example, it would be gaining some small exposure to tobacco. Investments held by managers who make decisions based on quantitative analysis trade in and out of thousands of individual stocks, often multiple times per day — at times, we’re likely to have some miniscule exposure there.

Critically, none of this is inconsistent with Brown’s divestment action. Because Brown is divested from tobacco, the endowment will not buy shares directly in a company that manufactures tobacco, and it will not invest in a strategy with a manager that primarily seeks to profit from tobacco products. But with an endowment this size and the need to have a diversified portfolio, it is almost inconceivable to be completely, perfectly divested from something with no incidental exposure at all.

Q: Given the share of investments now managed externally, is it even possible for Brown to divest in the way it did in the 1980s from companies conducting business in South Africa during apartheid?

Essentially, no. Given today’s realities, it’s not possible to divest the way Brown did in South Africa or Sudan. The change over time has been significant and is a critical consideration in divestment discussions. In the 1980s, endowments generally owned stocks directly, so if you wanted to sell your shares of, say, Coca-Cola to communicate a desire that Coca-Cola stop doing business in South Africa, that was a simple process. The complexity of financial markets has increased exponentially since then, and investment strategies have had to become more sophisticated to survive. Endowments today overwhelmingly invest through external managers — in Brown’s case, 96% of the endowment is managed externally — who typically commingle the funds of investors together into a single portfolio.

So a new divestment action today, to be consistent with Brown’s prior divestment actions, would address the currently 4% of the endowment that is directly invested by Brown. These are the stocks you can see in our 13F filing, which include some index funds, some healthcare companies and some financial services companies. None of the stocks Brown holds are with any of the companies discussed in the current divestment debates.

Q: The 2020 proposal to recommend divestment from “companies that facilitate the Israeli occupation of Palestinian territory” identified 11 specific companies. How much exposure does Brown have to these companies? How does this compare to broad market index funds like the S&P 500?

The average personal investor in the broad market likely has substantially more exposure to these companies than Brown, if Brown has any such exposure. First, Brown employs several different asset class strategies that have nothing to do with those companies — for example, these include real estate or small business lending in the U.S. More than half of our portfolio is invested in strategies that do not have a mandate to invest in those companies. Secondly, to have even the same level of exposure as the broad market, Brown would need to have 100% of the endowment in public stocks. Instead, we have less than 20% invested in public companies, approximately half of which is invested in strategies that focus on other countries. Ultimately, that means any exposure to the companies in question would be vanishingly small.  

Q: Why can’t Brown, as a large investor, simply demand that its third-party managers divest from certain companies?

The managers Brown invests with run their strategies in a commingled format, often for hundreds or even thousands of different investors. So every investor in the fund has the same portfolio, and specific exclusions would affect every investor in the same way. There are some managers that will manage funds in a separate account for an investor like Brown, and in those cases we do indeed utilize those formats and inform the managers of our divestment status on tobacco and Sudan and monitor their compliance. But this is a small minority of the available investment opportunities; today for Brown it represents an additional 4% of the endowment.

It may be surprising to hear, but Brown is not — in the world of institutional investing — a particularly large investor. State and corporate pension funds and sovereign wealth funds manage pools of capital that are many multiples of even the largest University endowments.

Q: More generally, how does Brown consider Environmental, Social and Governance (ESG) principles in its investment practices?

ESG is a framework for assessing how a company performs in areas of societal impact. There has been considerable progress in the area of identifying and measuring ESG factors, which are important to consider for an ethically minded investor like Brown that does not seek to profit from social harm. So we have incorporated an ESG scoring system into our due diligence and monitoring process and apply those scores to new investments as well as existing investments.

Brown’s endowment has been focused on these issues for decades, both for ethical reasons and for financial risk management. What has changed in recent years  is the investment industry, as corporations more broadly have moved toward a common vocabulary to communicate about these issues. Brown, of course, has embraced and supported that shift.

[Editor's Note: Two phrases were updated for clarity after original publication of the Q&A.]