At the current time in the United States of America we see a growing number of college campus protests. The primary cause of the protests would be the ongoing Gaza / Israel conflict, but one of the primary demands of the protestors is to urge Colleges / Universities to have their endowments divest of their holdings in companies that might support Israel. The pregnant questions from these events underway are twofold:
- Would such divestiture work to punish Israel or the companies that are targeted?
- Further, as an investor, are you exposed to a market collapse if said divestiture were to occur?
This month we’ll address these topics from a purely intellectual standpoint to see if you need to make any moves. Spoiler alert – I think you can decompress.
As a matter of definition, the protest demand to the endowment managers is known as the BDS movement – The Boycott, Divestment and Sanctions movement. I’m going to focus here on the Divestment element. The endowments of the top 688 colleges have a median market value $209,000,000 each. Notwithstanding that figure not being chump change, to be fair in disclosure the top five schools that have endowments of more than $5 Billion each make up 60% of all the total (Harvard is the biggest at $50 Billion itself)[i]. These endowments are used for a variety of ends but much of them are to support low-income students to be able to afford tuition at their selected school. Thus, the students who don’t want the tuitions that they are currently paying to the University to be used to support Israel are factually not using the endowment funds anyway, but I think that’s a side point.
The protestors demand for divestiture might be hard to do anyway (multiple managers, held in various large funds, lack of liquidity constraints, etc.) but presume here that endowment managers could easily sell off the ‘offending companies’. Ostensibly, the forced share sales would thereby cause pressure on the executive suite of these entities to act against Israel because otherwise their stocks will be dumped and their share prices drop (bad for shareholders and certainly any new issuance of shares). These targeted entities vary in focus from arms more readily identifiable ones such as military arms manufacturers like Raytheon (parent company United Technologies Corporation) to services provided by more household name firms such as Google and Amazon for technology or services support, and lodging facilities provided by VRBO.
The question before us – does endowment divestiture work as desired?
Here’s reasons of why it likely doesn’t:
- The total value of the USA stock market is currently $50,681,697,500,000 ($50 Trillion plus or minus a few pennies)[ii].
- Market Capitalization (market value) of all publicly traded companies in the world (i.e. including Siemens, who also makes arms for Israel) is roughly $126 Trillion.
- The total annual value of every import by Israel in 2023 was $104 Billion[iii].
- If 100 universities sold EVERY share they owned of every company (presuming they were all offending entities) it would total $20 Billion *(100 x $209 MM).
Putting simple math to the above economic measures we see:
- The total impact of these 100 college endowments acting in perfect concert…would be 0.04% *($20 Billion divided by $50 Trillion).
- Given some of the companies in those diversified university endowments also contain international companies, the impact at that level is even less at 0.02% *(same computation as above but on a total market capitalization of $126 Trillion).
- To embody maximum pressure, we’d have to presume that no one else in this world would buy those shares being offered for sale. I’m not the smartest guy in the world, but when a bunch of companies go on sale, someone is going to buy them. There will be price support no matter how much is sold because pension plans will buy them if individual investors would not as they have obligations to meet).
Beyond all the above, fire sale prices of good assets might expose the leadership at universities some legal issues for failing to act in good fiduciary standards in overseeing their endowments as future students who want to attend will have less money to support them attending the institution.
The above realities would seem to suggest the protestors’ demands toward divestiture would not succeed in extracting the pain desired. Nonetheless, even if the pressured endowment managers followed the divestiture demands placed on them, the world would view the accumulated security sales as a short-term blip and simply move on.
It remains my deep and distinct honor to serve you well.
Patrick Zumbusch
Founder and CEO
[i] “’Divest; College Endowments Turn Into A Flashpoint of Student Protests” (Richard Siegal, Danielle Douglas-Gabriel and Richard Morgan, The Washington Post, April 26, 2024).
[ii] “The Total Value Of The U.S. Stock Market O’ (Siblis Research Ltd., April 27, 2024)
[iii] Israel Imported Goods; 2023 (Observatory of Economic Complexity, OEC.com website, April 27, 2024)
