Daniel Fischel argues in today's WSJ that the "only ones to suffer [if colleges surrender to the anti-divestment fossil fuels movement] will be colleges that earn less money for research, services and student scholarships":
A new study that I and my colleagues at Compass Lexecon are releasing on Tuesday indicates that fossil-fuel divestment could significantly harm an investment portfolio. ...
Of the 10 major industry sectors in the U.S. equity markets, energy has the lowest correlation with all others—which means it has the largest potential diversification benefit. The sector with the second-lowest correlation with others is utilities, which includes many fossil-fuel divestment targets such as Southern Company and Duke Energy .
How does divestment affect portfolio performance? To get at this question, we constructed a model to track the performance of two hypothetical investment portfolios over a 50-year period: one that included energy-related stocks, and another that did not. What we found is that the optimal portfolio, which included energy stocks, generated average returns 0.7 percentage points greater than portfolios that excluded them on an absolute basis. In other words, the “divested” portfolio lost roughly 70 basis points compared with the optimal one—70 basis points for each and every year over the 50-year period in which the portfolios were active.
They also find that management fees are higher for funds that divest from fossil fuels, presumably due to the added administrative burden of making sure the fund's portfolio really is holier than thou.
This is a damning finding. The people who manage university investment funds are fiduciaries who must consider the long run impact of their decisions. Giving in to today's fossil fuel campaigners demonstrably will reduce future returns, negatively impacting not only current but future stakeholders. And, as we now know, the folks who have caught the divestment bug are unlikely to stop with one victory. It'll just be on to the next moronic cause.
It's time for university fund managers to grow a spine and tell the divestment crowds to take a hike.