Much has been written about the Yale endowment model, elements of which numerous institutional investors globally have attempted to replicate over time (albeit with varying degrees of success). Rather less has been written about the endowment approach of Grinnell College in Iowa, although Jason Zweig did author a memorable article in Money Magazine back in 2000.
The story of Grinnell is closely entwined with the story of Joe Rosenfield, who graduated from the college in 1925 and later served as a board trustee for 59 years. One of his primary objectives during these decades of service was to make the college “financially impregnable,” which he accomplished by overseeing the growth of its endowment from US$11m in 1968 (the year he convinced Warren Buffett to join Grinnell’s board of trustees) to over US$862m in 2000 (the year Rosenfield passed away). That’s a CAGR of just under 15% over 32 years, although this calculation of course excludes the impact of additional gifts and contributions to the endowment, as well as disbursements made, during this period. Today, Grinnell’s endowment is valued at just over US$2bn, among the largest endowments of undergraduate liberal arts colleges in the US.
Rosenfield’s life and legacy is the subject of a recently published book Mentor, written by George Drake, a historian and former president of the college. The book is a good read, although it is likely to be of greater interest to those with a link to either Des Moines or Grinnell. It does contain some fascinating stories, however – from Buffett’s influential role on the finance committee, to how Rosenfield helped arrange the seed funding of Intel Corporation (co-founder Robert Noyce was a Grinnell alum), to the college’s unconventional purchase of a television station in Dayton, Ohio, as well as Steve Jobs’ brief tenure as a Grinnell trustee in the 1980s.
Given the aforementioned factors, one might be forgiven for concluding that there is nothing replicable about Grinnell’s endowment success. Viewing the outcome as purely a lucky confluence of events, however, does disservice to the underlying principles and structure that enabled things to happen as they did. And much of that was put in place by Rosenfield.
Below are a few things I learned from the book (some direct excerpts and paraphrasing):
Work on reducing the agency stack in your own investing:
In economics, one learns about the potential issues that can arise from the principal-agent problem. The challenge for many institutional investors, including endowments and foundations, is how to navigate what is often a stack of principal-agent dynamics. Consider, for example, that an institutional firm’s investment committee, which acts on behalf of its limited partners (e.g. a pension fund, itself acting on behalf of the underlying pensioners), will allocate capital to third-party funds, who will then invest in companies, which in turn appoint professional managers to run them.
Grinnell took a different approach, going against the conventional wisdom that boards usually do badly if they do their own investing. In 1970, soon after Buffett had joined the board, Rosenfield relinquished the chairmanship of the investment committee in favour of him. The two of them worked together directly on investments, often speaking weekly or biweekly. Given the frequency of their interaction, they did not typically consult the board on new investments.
This clearly only worked because the board had complete faith in Rosenfield, and therefore Buffett, to always act in the interests of the college. The benefit was that it drastically reduced decision making time, eliminated layers of costs (in particular, those related to incentivization and monitoring) and allowed the college to pursue opportunities that would not have passed the filter of a typical trustee-led investment committee.
Remarkably, by the time Rosenfield died in 2000, Grinnell had fewer than twenty different stocks and mutual funds, and ten of those stocks were in the Sequoia Fund. Many colleges had more investment managers than Grinnell had investments. The lesson here: you don’t need to be picking stocks directly, but you are likely to be better off if you work to reduce the agency stack (wherever possible) in the context of your own investing.
Different playbooks required for growing vs. preserving capital:
Experienced entrepreneurs recognize that companies go through stages of life. One needs to tweak the approach based on the needs and objectives of the organization at each stage – what works at an early stage likely won’t work during the growth phase, or when the company becomes much larger and your responsibilities to various stakeholders increase.
It’s similar in investing. Growing capital off a small base requires a different approach to preserving capital off a larger base. The level of risk tolerance shifts (you don’t necessarily want to be swinging for the fences) and, depending on how much success you’ve already had, size may also become the enemy of performance (it will become harder for the incremental investment to move the needle).
In its early/growth stages, Grinnell adopted a much more nimble, opportunistic and concentrated approach to investing. In over 20 years, Buffett and Rosenfield made just over a half-dozen investments. The five most significant of these were the purchase of Buffett’s Berkshire Hathaway, providing the seed funding for Intel Corporation, the buyout of WDTN television station, and investments in the Sequoia Fund and Freddie Mac.
They may have been even more concentrated if it weren’t for Robert Noyce’s sensitivity to the high degree of endowment dependence on Intel stock (as an example of when concentration can unintentionally go wrong, see Macalester College and its gift of Reader’s Digest stock). He urged Rosenfield to sell all or most of it, which the college did from 1974 to 1980. The initial US$300k investment had turned into US$14m but the opportunity cost of that premature sale ended up being in the billions of dollars.
Once Buffett stepped down from Grinnell’s board and Rosenfield passed away, the board had to adjust its approach. The endowment was also significantly larger, approaching US$1bn. As per Drake, “the solution gradually adopted in the 1990s and accelerated following Joe’s death was to regularize procedure and accept a new degree of disciplined decision making. Analysis and and decisions came to rely increasingly on what we today call “metrics,” which is to say that the board has become reliant on extensive research and data to shape its decisions. The Grinnell board has come to look a lot more like most good college boards after decades of being an outlier under Rosenfield.”
Prioritize relationship building and partnerships
Rosenfield was extremely generous with his time and enjoyed connecting with people from across all generations and backgrounds. Buffett writes that the main thing about Rosenfield was his “generosity of spirit; I never really saw any aspects of his behavior or personality or anything in any way that would turn people off. He just embraced humanity.” Buffett also commented that Rosenfield “never asked for anything in return. He was not a fellow who kept score; the great friends never do.”
Drake surmises that a major motivation for Rosenfield’s penchant to reach out and mentor young men and women was to compensate for the loss of his son, who tragically passed away following a car accident at the age of 17. Some of Rosenfield’s mentoring relationships included those with Robert Noyce, Jim Cownie and Jim Hoak (the founders of Heritage Communications), Martin and Matthew Bucksbuam (the creators of General Growth Properties) and Jill June (the director of Planned Parenthood of Iowa). He often emphasized to them the value and joy of giving when alive so they could see the good their contributions did.
Rosenfield’s particular faith in a young Robert Noyce led to the college providing 10% of the startup capital for Intel (US$300k of the initial US$3m), which turned out to be a very good decision for Grinnell. US$100k came from Rosenfield, US$100k from fellow trustee Sam Rosenthal and the remaining US$100k came from the endowment. Both Rosenfield’s and Rosenthal’s investments were made on behalf of the college; they would absorb any losses while the college would benefit from the gains.
In Rosenfield’s words, “one thing we did, several of us urged Bob to leave the company he was with (Fairchild) and go into business for himself. And Sam Rosenthal, a fellow trustee, and I took it upon ourselves to tell Bob that we would raise money or put up the money to start the company. And he said “We’re working on it. Someday we’ll do it.” I remember one [trustee] meeting he came to me and said “Well, we’re ready to launch a new company and if you fellows are interested, we would like you as part of the group.”
Lead and act without ego
The role and thinking of institutional investors has evolved over time, with ESG considerations increasingly coming to the forefront of decision making (for example, see Yale’s recent update on climate change). During the 1980s, the defining student issue at Grinnell was the movement to end apartheid in South Africa. This led to increased student pressure on the board of trustees to divest stocks in corporations doing business in South Africa, especially after conditions spiraled out of control in 1986, creating a state of emergency as the government suspended most civil liberties.
The board initially resisted divestment on ethical grounds, with Rosenfield saying “South Africa today, nuclear energy, cigarettes and liquor tomorrow. There is no end to ethical divestment. It is our business as trustees to maximize the endowment; not to create arbitrary limits. Besides, how do you determine what is ethical?”
Eventually, the constant student pressure and events in South Africa weighed more heavily than Rosenfield’s influence. It was a rare example where he was on the “wrong end” of a board decision. The board finally started to divest stocks doing business in South Africa and Rosenfield accepted this with good grace, his motivation driven only by what was best for Grinnell.
Know the why behind whatever you are doing:
Rosenfield’s student years at Grinnell led to a life-long love affair with the college. He cared far more about the performance of the Grinnell endowment than about his own net worth; in many cases structuring risk-free deals for the college where if an investment went down, he would take the loss. Buffett wrote that “all this took place because he loved the Grinnell students as he loved the members of his own family. They were his flock. And his interest did not diminish in any way after their graduation. He regularly filled me in on what the graduates were accomplishing, describing them with words and tones of a proud grandfather.”
The endowment Rosenfield built had a tangible impact on the college. Enrollment grew significantly from the 1960s to the early 2000s, as did the overall quality of students. This would not have been possible without the enhancement of program and facilities made possible by the endowment. The college is also able to maintain a need-blind admission policy, which means students are admitted without regard to their financial needs, and once admitted, their costs in excess of what the family can provide are covered by the college through scholarships and loans. Finally, Grinnell’s students leave with unusually low debt because financial aid packages are high on grants and low on loans.