benjamin franklin’s endowment a noble experiment
TRANSCRIPT
Benjamin Franklin’s Benjamin Franklin’s EndowmentEndowment
A Noble ExperimentA Noble Experiment
Franklin’s BequestFranklin’s Bequest
• Franklin was America’s first great Self-Franklin was America’s first great Self-PromoterPromoter
• Beyond Ego, the gifts served 2 main Beyond Ego, the gifts served 2 main purposes:purposes:– Assist young tradesmen in starting Assist young tradesmen in starting
businesses (as he had been helped)businesses (as he had been helped)– Finance large scale civic projects in the Finance large scale civic projects in the
future (Franklin had founded a library and a future (Franklin had founded a library and a fire company)fire company)
Franklin’s BequestFranklin’s Bequest
• Franklin left 1000 pounds sterling to Franklin left 1000 pounds sterling to Boston and PhiladelphiaBoston and Philadelphia
• Money was to be lent to “young, married Money was to be lent to “young, married artificers” – with two guarantors -- at 5%artificers” – with two guarantors -- at 5%
• This was a below-market rateThis was a below-market rate– Commercial Rates in Philadelphia were 6-Commercial Rates in Philadelphia were 6-
10% in the late 1700s, 1799 Federal Bonds 10% in the late 1700s, 1799 Federal Bonds were 8% & New England Munis 6.30% were 8% & New England Munis 6.30% (1)(1)
(1) A History of Interest Rates p. 286
Franklin’s BequestFranklin’s Bequest
• Franklin expected the city to manage the Franklin expected the city to manage the funds; in Boston, he presumed that there funds; in Boston, he presumed that there would be civic-minded volunteers.would be civic-minded volunteers.
• Franklin expected that management would Franklin expected that management would be voluntary.be voluntary.
• In practice, both cities were unable to find In practice, both cities were unable to find enough takers (despite increasing loan enough takers (despite increasing loan amounts and relaxing requirements.)amounts and relaxing requirements.)
Franklin the FuturistFranklin the Futurist
“ “ Noble ambitions …. poor execution”Noble ambitions …. poor execution”
• Primary goals: 1. Economic growthPrimary goals: 1. Economic growth2. Capital growth2. Capital growth
3. Significant 3. Significant contribution contribution to enhance to enhance communitycommunity
Franklin the FuturistFranklin the Futurist
“ “ Noble ambitions …. poor execution”Noble ambitions …. poor execution”
• Franklin failed to realize his goals due to:Franklin failed to realize his goals due to:– Shortsightedness w.r.t. expected changes in Shortsightedness w.r.t. expected changes in
the macro environment the macro environment – Assumption of complete and timelyAssumption of complete and timely
investment and collection of loansinvestment and collection of loans– Insignificant monetary sum for disposition Insignificant monetary sum for disposition
into the community into the community
Franklin’s Expected ReturnsFranklin’s Expected Returns
Franklin's Endowment: 200 Year Growth
£1
£10
£100
£1,000
£10,000
£100,000
£1,000,000
£10,000,000
Franklin's Endowment: Full Reinvestment vs. Year 100 Withdrawal
£0
£5,000,000
£10,000,000
£15,000,000
£20,000,000
With Reinvestment
With Withdraw al
Franklin counted on the full utilization of his pool of Franklin counted on the full utilization of his pool of capital in 5% loans to young craftsmen for the capital in 5% loans to young craftsmen for the
expected return on his intergenerational investmentexpected return on his intergenerational investment
Franklin counted on the full utilization of his pool of Franklin counted on the full utilization of his pool of capital in 5% loans to young craftsmen for the capital in 5% loans to young craftsmen for the
expected return on his intergenerational investmentexpected return on his intergenerational investment
Other Financial Metrics: Other Financial Metrics: Equity MarketsEquity Markets
0
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1814 1839 1864 1889 1914 1939 1964 1989
Estimated Equity Returns
CPI
Franklin's Bequest (without disbursement)
0
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1814 1839 1864 1889 1914 1939 1964 1989
Estimated Equity Returns
CPI
Franklin's Bequest (without disbursement)
Other Financial Metrics: Other Financial Metrics: Interest RatesInterest Rates
Opportunity costs of Opportunity costs of capital must be capital must be
considered when considered when making an making an
investment. While investment. While capital markets capital markets
exhibited volatility exhibited volatility during the past 200 during the past 200
years, over that time years, over that time equity markets equity markets
returned about 9.5%returned about 9.5%
Opportunity costs of Opportunity costs of capital must be capital must be
considered when considered when making an making an
investment. While investment. While capital markets capital markets
exhibited volatility exhibited volatility during the past 200 during the past 200
years, over that time years, over that time equity markets equity markets
returned about 9.5%returned about 9.5%
Actual Rate of Return on Actual Rate of Return on Franklin’s GiftsFranklin’s Gifts
CityBeginning
ValueEnding Value
Cumulative Return
Effective Annual Return
Boston 4,375 390,000 8814% 4.59%Philadelphia 4,375 100,000 2186% 3.18%
Boston 94,000 5,000,000 5219% 4.05%Philadelphia 24,000 2,000,000 8233% 4.52%
First 100 Years: 1790 - 1890
Second 100 Years: 1890 - 1990
Actual Rate of Return on Actual Rate of Return on Franklin’s Gifts (2)Franklin’s Gifts (2)
0
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
Estimated Equity Returns
CPI
Boston Endowment
Philadelphia Endowment
Problems of the GiftProblems of the Gift
Franklin ignored significant risks to the Franklin ignored significant risks to the realization of his visionrealization of his vision
• Use of funds to narrowly defined Use of funds to narrowly defined • Societal / Economic / Structural riskSocietal / Economic / Structural risk
• Default riskDefault risk• Dead money riskDead money risk• Political / Bureaucratic risk Political / Bureaucratic risk
Alternate StructuresAlternate Structures(Hindsight)(Hindsight)
Swensen Argument:Swensen Argument: • Fiduciaries articulate investment goalsFiduciaries articulate investment goals• Investment policy and asset allocationInvestment policy and asset allocation• FlexibilityFlexibility
Hansmann Argument:Hansmann Argument:• Current investmentCurrent investment• Inefficiency: over time original purpose less Inefficiency: over time original purpose less
valuable and difficult to divertvaluable and difficult to divert• Self-interest of fiduciariesSelf-interest of fiduciaries
LessonsLessons
•Risk vs. ReturnRisk vs. Return– Opportunity costs and purchasing power Opportunity costs and purchasing power
preservationpreservation
•Today vs. Tomorrow Today vs. Tomorrow – Agency issuesAgency issues
•Flexibility vs. PrescriptionFlexibility vs. Prescription– Long-range relevance / structure of giftLong-range relevance / structure of gift