Editorial

As the United States moves forward in the 21st century it is becoming increasingly clear that one of its primary competitive advantages is its superlative system of universities and colleges. They are the envy of foreign nations, attracting wealthy and talented students from all over the world. One of the ways that America’s institutions of higher education are thought leaders is through their unique endowment strategies.

America’s colleges use traditional asset managers to invest the bulk of their endowments, but they also have what I like to call “hidden endowments”. These hidden endowments consist of substantial collections of art or antiques – often accumulated over decades or even centuries – that are almost never included in a university’s publicly acknowledged endowment numbers.

In a very real sense, universities and colleges are on the cutting edge of asset allocation while the traditional asset managers of the world are lagging behind, stuck in a morass of overvalued stocks and bonds.

Let me give you an example. I attended a small, liberal arts college of about 2,200 students in flyover country. This college was academically rigorous and well regarded, with a good regional reputation. My college also had what would be considered a very modest endowment, particularly when compared to Ivy League universities. As part of my academic studies, I had access to two special art endowments that the college had acquired in the early to mid 20th century.

The first was a collection of Czarist-era Russian icons, paintings and miscellaneous objets d’art. This amazing collection was stored at the college president’s house. There was even a silver and lacquer Russian Easter egg attributed to a Faberge workmaster. At the time (the 1990s) the jeweled egg had been appraised at $600. I was incredulous at the ridiculously low valuation on the item and almost offered the president of the college $600 for the treasure right then and there. How much do you think such a work of art might sell for today?

The second collection I had the pleasure of inspecting consisted of antiquities and ancient coins from the Classics department. These pieces exceeded all my expectations. There were numerous cylinder sealstones from ancient Mesopotamia, an outstanding selection of oversized Egyptian Ptolemaic bronze coins, Roman Republic silver denarii, and various other antiquities. These specimens were gathering dust in a couple display cabinets in a corner of the rarely visited Classics building.

These art collections were certainly not the only ones that the college possessed. For example, although I never saw it personally, the college library had a rare book collection that included medieval illuminated manuscripts. Also, while there were only a few dozen pieces in the Russian icon collection, the items had been assigned catalog numbers in the 400s and 500s.

This strongly implies that the college had, at a minimum, over 400 other works of art that it believed merited a catalog number. That, my friend, is a lot of art. I also believe that the antiquities from the Classics collection that I handled were essentially forgotten and most likely not officially cataloged.

In short, my inconsequentially small alma mater – one of a couple thousand non-profit institutions of higher learning in the country – possessed a substantial asset allocation to art and antiques, completely separate from its publicly recognized endowment. And it is undoubtedly not the only college to have methodically squirreled away art, either. It begs the question – what secrets do universities and colleges know about investing that traditional asset managers and the investing public do not?

Several years ago my grandmother died. One of my duties was to help the family with cleaning out her house. She was 95 years old when she passed and had possessed a lifetime interest in antiques and collectibles. Her spacious, two-story brick Victorian house was absolutely crammed full of old things – too many old things in fact.

My grandmother had been a young adult during the Great Depression and the experience of that traumatic period stayed with her for her entire life. As a result, although she was not a hoarder, she never threw out anything useful. It didn’t matter whether it was a gift, or an item she had picked up at a church bazaar or even something she scavenged from the neighbor’s trash – she kept them all. She even went so far as to clean disposable plastic silverware and carefully sequester it for a future use that happily never came.

So you can imagine how monumental the task of cleaning out her house seemed. And yet, mixed in with the apprehension was also a vague sense of excitement. This was going to be the biggest treasure hunt I had ever participated in. There were hushed whispers among family members of the possible value of the antiques in her estate…$30,000…$40,000…more? No one knew for certain. All we did know is that she had a house crammed full of a lifetime’s worth of antiques, collectibles and stuff.

To make a long story short, while the emotional value of what we found was tremendous, the dollar value was much smaller than expected. The aggregate value of the house’s contents was between $8,000 and $15,000, although that number would have been higher if the economy hadn’t been in the midst of a severe recession. In the aftermath of these developments, an interesting concept related to the Pareto principle became evident.

The Pareto principle, or 80-20 rule, was an idea conceived by Italian economist Vilfredo Pareto in 1896. It states that 80% of an effect originates from 20% of the related inputs. The Pareto principle is often found in business situations where, for example, 80% of a company’s sales might come from 20% of its products.

What does the 80-20 rule have to do with cleaning out my grandmother’s house you ask? Simply put, I discovered that approximately 80% of the monetary value of the contents of my grandmother’s house was concentrated in 20% of the antiques. Only a small proportion of her antiques had significant dollar value.

For example, most of the value came from a few specimens of mid to late 19th century Victorian furniture, the good sterling silverware, a couple pieces of fine jewelry, a single gold coin and perhaps a handful of glass and porcelain pieces. While there was a lot of stuff in the house, most of it had either very limited or no value, other than sentimental.

The loss of a loved one can be an overwhelming event, but liquidating their estate can be a little easier if you understand Pareto’s 80-20 rule. In the case of a random accumulation of antiques it is a pretty safe bet that 80% of the value present will be concentrated in 20% of the items. Concentrate on making sure you understand which 20% of the items have the value and don’t let them slip through your fingers out of ignorance.

This will limit any “value leakage” from the estate. Keep in mind that this 80-20 rule will not apply if the estate consists of an organized collection of antiques, rather than a haphazard accumulation.