 | Board of Visitors minutes January 27, 1940 |  |
REPORT OF THE FINANCE COMMITTEE OF THE BOARD OF VISITORS OF THE UNIVERSITY OF VIRGINIA:
Mr. Frederic W. Scott became chairman of the Finance Committee of this Board in 1921 and
continued in that position until his death in October, 1939. During this long period of eighteen years
Mr. Scott gave his great ability and large experience to the investment and management of the funds of
the University that are under the control of this Board.
Mr. Scott's sudden death made it important to the Finance Committee of this Board, and the
new Rector, that a study should be made of the University of Virginia investments.
This committee arranged with Messrs. Scudder, Stevens and Clark, Investment Counsel, to
make an appraisal and classification of certain University of Virginia funds, to-wit: Consolidated
Funds, Seward Estate, Blandy bequest and real estate and fraternity loans and the report made by
these Investment Counsel is returned herewith. This report is dated December 15, 1939 and the
schedules therefor are largely self explanatory.
In the brief introduction to the schedules the Investment Counsel give a summary of the
distribution of capital according to the Moody ratings. The figures apply only to the Consolidated
Funds, which are of dominant importance in the combined appraisal.
In a summary at the bottom of page 3 the Investment Counsel find that about 40% of the
capital in the Consolidated Funds represents issues of bond grade and the average current interest
yield from this group is 3.91%. "In a current appraisal of the defensive strength of the position",
say Investment Counsel, "approximately 9% in available cash should really be added to the prime bonds,
making a total of 49%, or almost half of the capital in what could be termed a defensive backlog."
This report further finds that there is about 6% in second grade issues having a higher
yield of 5.82%.
Investment Counsel then make this important summary:
"This brings the proportion of the Consolidated Fund accounted for to 55%, leaving a balance
of 45%. Aside from the 2% in miscellaneous holdings, there is 30% in common stocks and 13% in the
remaining bonds and preferred stocks which should realistically be considered the full equivalent of
common stocks from the risk standpoint. A number of these high issues are not now paying income,
but the majority are and on them the average yield is almost 7%, a clear indication that their
intrinsic quality is open to question in the market."
"In summary, therefore, what might be called the `Risk Capital' in the Consolidated Fund
comes close to half of the total and is not fully revealed by the 30% common stocks alone."
It must not be forgotten that Investment Counsel did rate appraise and classify all the
endowment funds of the University of Virginia, amounting in 1939 to more than eleven million dollars
($11,020,113) but confined their study to the Consolidated Fund, the total of which is shown in their
summary as $2,494,978.56; to Seward Estate funds shown in their total as $257, 925. 24, and the Blandy
bequest shown in their summary as a total of $461,542.22, and Real Estate Notes and Fraternity Loans
amounting to $247,195.27. The grand total for the funds named is $3,461.29. In round figures 8% of
this total was in cash, 10% was invested in real estate and fraternity loans, 46% was invested in bonds,
21% was invested in common stocks and 11% was invested in preferred and guaranteed stocks. The income
from these investments was about $123,000, or a yield of nearly 4%.
We insert at this point an exhibit under the capiton "A Study of Investments Of All the
Endowment Funds of the University of Virginia, Excluding the Folkes Scholarship Fund, for the two
fiscal years 1938-39." The total of such investments for 1939 is a little over eleven million dollars
and the total income therefrom is a little over $422,000, or an average return of 3.82%, but the test
of good management applied to this Board must be the funds, covered by the appraisal and classification
made by the Investment Counsel, for these are the funds under themanagement of this Board.
After obtaining the appraisal and classification from Investment Counsel, the Finance Committee
spent some time in conference with Mr. James H. Scott and Mr. Buford Scott. We were advised that Mr.
James H. Scott was the constant assistant of the late Rector in the management and investment of the
investment funds of the University, immediately under control of the Board of Visitors, while Mr.
Buford Scott was both the son and partner of Mr. Frederic W. Scott.
Mr. James H. Scott supplied the Rector and members of the Finance Committee with a copy of a
letter that he wrote Mr. Frederic W. Scott on the 18th of last August and this letter is filed as a
part of this report.
It appears that in 1930 the book values of the investments were changed to the then market
and that this resulted in a net write-up of the book values of the various sums in the total of $235,928.14.
Between 1930 and June 30, 1939, Mr. Scott reports that the sale and redemption of securities in the
Consolidated Funds resulted in net profits of $56,823.68 over the book values as established in 1930.
He then adds these profits to the write-up and gets a total addition to the book value of the Consolidated
Fund of $292,752.00 and this sum he claims should be credited against the unrealized
depreciation from book values on June 30, 1939 in the sum of $446,210.00, leaving a net shrinkage of
$153,458.00.
The Board will be interested in determining the source of any profit realized on the sale of
securities. Mr. Scott reports that most of the profit of $56,823.00, realized on the sale of securities
between 1930 and 1939, was made from the sale and redemption of bonds in the industrial and miscellaneous
the railroad preferred and guaranteed stock group, Mr. Scott declares as follows, to-wit:
"While these losses have been offset in part by profit on industrial and
miscellaneous bonds, the larger profits have come from the retention of common stocks
received as legacies and held by the University over a long period. Through this
combination the fund has been substantially kept intact through the recent difficult years."
It is common knowledge that it is very difficult to invest large funds in safe properties
or securities and to obtain a satisfactory yield from such investments. If this Board should confine
its investments to those investments in which section 5431 of the Code declares "fiduclaries may
invest", the yield in income would be insufficient to meet appropriations that this Board now makes
for the support of this University.
The fundamental question is, however, is this Board confined to the investments, sometime
designated as legal investments, under section 5431 of the Code of Virginia. This committee requested
an opinion upon this question from Mr. W. Allan Perkins, the attorney for the University, and he
advised that section 5431 was not mandatory, but permissive and that this section does not exclude
the right of the fiduciary to invest in other securities than those enumerated in 5431, when in so
doing the fiduciary exercises sound discretion.
It is the duty of this Board to exercise care and diligence; we are trustees who must
exercise good faith, sound discretion, prudence and care.
While the section defining investments that a fiduciary may make is permissive and not
exclusive, we must not forget that this section is a deliberate definition by the General Assembly
of Virginia of the character of investments that are considered safe for trust funds.
While we do not think that this Board should be confined to the investments nominated in
the statute, yet we do not think that this Committee should buy common stocks, without first obtaining
the deliberate approval of the Board of Visitors of such investments.
Mr. James Scott's letter finds "that the unrealized depreciation of $78,524.00 in the
common stock group would show instead an unrealized profit of approximately $140,000, if referred
back to the original price at which the securities were bought or taken over."
There are many arguments in favor of prudent investment and careful dealing in high grade
common stocks. This committee is aware that the trustees of a number of our educational funds do
invest a considerable percentage of such funds in common stocks and that the results, over a period of
years, often justifies such investment.
Mr. James Scott's finding indicates that the investments made in common stocks by Mr.
Fred Scott of certain of the funds under control of this Board were profitable. Of course, it must
be remembered also that profits were realized from common stocks that came to this Board as gifts.
Even if no new common stocks be purchased at the present, the Finance Committee will still
be faced with the continuing problem of when and at what price to sell common stocks that were not
purchased by this Board, but that came into the portfolio of this Board by gift. It is, of course,
the duty of this Board to exercise a wise and informed discretion in determining when and at what
price disposition should be made of any of the investments. This Board has a clear right to retain
common stocks that are a part of gifts to the University of Virginia as long as it would appear
wise to retain such stocks. The problem is to determine when a particular investment, including
common stocks, should be sold and there should be no general rule against the retention of such common
stocks.
The Committee has gone over the list of investments shown in the report made by Scudder,
Stevens and Clark and has marked the particular investments that should be held and those that
should be disposed of. It is suggested that the Board consider giving the Finance Committee
suthority and discretion to dispose of any of these securities at such time and at such price
as deemed best, or to exercise the Committee's best judgement in retaining any of these investments.
HOW SHALL THIS FUND BE MANAGED HEREAFTER?
The Finance Committee has considered the advisability of employing investment counsel.
The cost of employing investment sounsel for this fund is estimated to be more than $7000.00 per
year. This is a large sum and it is doubtful if the value of the services to be rendered by
investment counsel will do more to promote a reasonably safe and profitable operation of the funds
than can be accomplished by obtaining the constant advise of experienced and dependable investment
bankers.
For the present the Finance Committee recommends that this Board continue to consult Scott
and Stringfellow, Investment Bankers, of Richmond, who are familiar with our funds and especially
continue to consult Mr. James H. Scott, who worked intimately with Mr. Fred Scott for some years
up to the time of his death, However, this Board should retain its freedom of action in order that
it may have the right to consult other investment bankers or even, if and when deemed desirable,
to consult investment counsel.
of the University of Virginia.
| Board of Visitors minutes January 27, 1940 | |