Last week the New York Times published yet another article about the decline in university endowments.  The second paragraph of that article is just plain scary:

But as the schools, one by one, disclose their numbers, the managers of these endowments are indicating their continued support for a diversified portfolio chock full of alternative investments like hedge funds, private equity and real estate — the very things that have caused so much trouble.

Gambling Warning SignNone of these managers would want me on their Boards of Trustees.  In my humble opinion, the goals of non-profit investing should be to ensure that the corpus is maintained, while making a conservative return.  Why?  Well, Harvard University and Yale University, as well as West Virginia University and Marshall University, are just too important to have their endowments (our donations!) frittered away on high-risk, high-reward options, even if the returns generally will be higher over the long term.  Non-profit higher education institutions also need consistent revenue, not obscene profits.  These high-risk strategies should be considered breaches of fiduciary duty.

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The New York Times published yet another interesting article about high-frequency market trading on Sunday.  These articles all center around the arrest and prosecution of Sergey Aleynikov, a former Goldman Sachs employee accused of stealing software code.  The proprietary code supposedly helps Goldman buy and sell stocks in milliseconds and profit from tiny price discrepancies.

No big deal, right?  An eighth or sixteenth of a penny here or there couldn’t add up to much?  Just $8 BILLION across the industry, estimates one market research firm.  And from whom was the $8 BILLION taken?  Average investors like you and me.

Is the criminal arm of justice going after Mr. Aleynikov to protect you and me?  No, it’s going after him to protect Goldman Sachs.

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Yet another topic addressed by World Conference on Higher Education attendees was the trend of decreasing government contributions to higher education as a percentage of the overall cost of higher education.  This trend is especially pronounced in Europe, which has a tradition of providing free public higher education.  But the trend also is pronounced in West Virginia.  At the beginning of the millennium, the State paid about 60% of a four-year student’s cost of education (not cost of attendance, which includes room and board, etc. and is another matter); nine years later students are being assessed almost 60% of the cost.  A dramatic shift.  Having said that, please realize that this analysis ignores student financial aid, which increased dramatically over that same period at the state level, so West Virginia higher education – especially baccalaureate institutions, which benefitted disproportionately from the PROMISE scholarship – is not quite as poor as some claim.

Despite what you might hear in the hallowed halls of academe, there is a reasonably good argument for having students pay for their own higher education, even if they have to take out student loans to do so.  In 2006 the average male with a high school diploma earned $37,030, while the average male with a bachelor’s degree earned $60,910. A rather substantial loan payment could be made with that $23,880 in extra income.  If the average college graduate is going to see that kind of benefit, why shouldn’t he or she pay for it?  Furthermore, why should that high school graduate earning $23,880 less than the college graduate subsidize the college graduate’s education with his or her taxes?

There are two reasonably good responses to these points.  The first relates to fairness and equity.  Research tells us that students from poorer families, particularly with no history of college attendance, too often make the wrong decision from a purely economic perspective not to attend college.  Do we really want the rich to get richer and the poor to get poorer?  The second relates to the larger public benefits that accrue to an educated society – stronger economic development, greater civic engagement, etc.  The rising tide of education lifts all boats.

Earlier this week the New York Times reported on a new “investment fund.”

“Investing in Lawsuits, for a Share of the Awards”

Instead of investing in stocks or bonds or even mortgage-backed securities, Juridica Capital Management invests in lawsuits.  Juridica, says the New York Times, “invests in one side of a lawsuit in exchange for a share of the winnings.”  To the legally unitiated, this may seem bizarre.  But lawyers who take cases on a contingent fee basis and who enter into co-counsel arrangements in order to finance high-cost litigation, such as class-action lawsuits, do much the same thing.

Juridica seems to be going down a road that is very similar to the one previously taken by bankrupt and near-bankrupt financial services companies, which never seemed to run out of new investment ideas.  Will we soon have a new financial market for lawsuits?  Will we soon pool together legal risks and sell and resell them so that no one can determine their true value?

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CONTACT

DCT Advisors LLC
3288 Winfield Road
Post Office Box 224
Winfield, West Virginia 25213
Phone: 304.541.0332
Fax: 866.783.0511
Email: dct@dctadvisors.com

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