Treasurer Cabot Invests $308,000,000

While ruminations on what he would do with 300 million dollars are the occasional day-dream of the average University official, such thoughts are the perpetual nightmare of Paul C. Cabot '21.

His 300 million dollars are like 300 million eggs in that they would make a mess if put in an unstable basket. It is Cabot's task therefore to place them in widely diversified yet highly profitable baskets, a responsibility which is obviously too staggering for one man.

Hence during the five and one-half years he has held the job, Cabot has worked with the guidance of a full-time staff of 30. This group of consultants is known as the State Street Research and Management Company, and its findings are shared by only two clients--the State Street Investment Corporation, of which Cabot is president, and Harvard University, of which he is treasurer.

Statutory Instructions

Harvard Statutes provide that while serving in the latter capacity he "shall have charge of investments of the University, and except as the Corporation with the consent of the Overseers shall by vote from time to time otherwise direct, shall have charge and administration of the finances of the University."

And his task is every bit as cumbersome as his statutory instructions. As a matter of fact, the better the treasurer, the more voluminous becomes his work, for his investment funds appreciate with compound interest.

On the other hand, however, a mistake made with $100,000 which would have been disastrous a century ago would be hardly noticeable today.

In general, Cabot, with his total investment assets of approximately $308,000,000 faces the same problems as the 17th century treasurer. Although dealing in bigger sums, he has confidence and security unknown in the precarious past, and this is the major difference.

Survival possibilities which Thomas Danforth, the first treasurer, pondered with growing concern in the 1650's are taken for granted by Cabot's going concern of the 1950's. Financial affairs were so crucial during Danforth's reign that President Dunster decided to handle them himself.

The first president ran the University on an annual budget of 175 pounds, 55 of which were Dunster's own salary. Tuition then was about a pound and a third per year, but the student had to pay an additional three pounds when he received his degree. Whatever capital was available in those days could be let out at eight percent.

No Surplus to Invest

Dunster was more occupied with making ends meet, however, than with investing surplus. In fact, the school's financial condition was so dubious in 1653 that the Massachusetts General Court began an investigation. The following year, the Court's committee ordered that financial powers be transferred from the Corporation to the Overseers.

This was too much for Dunster, and the first president, calling the committee's action "questionable and offensive," immediately resigned. Fortunately for the good name of Harvard, however, the investigation proceedings were not televised.

Although Dunster upbraided the Commonwealth for its interference, one should remember that Massachusetts presented the struggling school with over $215,000 between its founding in 1636 and 1824. The surrounding municipalities were also very generous to the University during its fight for survival in the 17th century, with almost every New England town appearing on the roll of donors.

And the local farmers lent a hand as well. The "College Corn" campaign to which each family was asked to contribute a peck of wheat per year supported a dozen scholarships and paid the salaries of the entire faculty during this period.

Thanks to these and other friends, the annual free income from investment had climbed to 728 pounds by 1732. Two years later, the College devised a new scheme for financial stability. From that date forward, revenue raising and hell raising would take place simultaneously.

The College Laws of 1734 levied a five shilling fine for "Fighting; lying; drunkeness; tumultuous and indecent noises; and going on roof of old Harvard or cutting lead from same." The penalty was ten shillings for "Profane cursing and swearing; playing cards or dice; neglecting anaysis of scripture; walking or other disturbances on the Sabbath; and firing gun or pistol in Yard."

There followed a third group of still more serious offenses, and if the treasurer and logic had had their way, the fine for these acts might have been one pound. The Laws of 1734, however, decreed expulsion for such offenders.

Just how much revenue accrued from undergraduate misbehavior the records fail to state, but it is likely that the figure was insignificant compared to that of funds invested in private notes, bonds, and mortgages. The books are a little hazy even on investment totals, however, for it was during the 1770's that one of American's greatest patriots and undoubtedly Harvard's worst treasurer, John Hancock, earned his dual reputation.

Wrapped up in the cause of the tyrannized colonies, Hancock was frequently out of town and handled the University's funds without troubling to keep books. By 1776, the school bad had enough, but Hancock paid no attention to hints that he resign his stewardship.

Finally in 1777, the Corporation at the request of the Overseers replaced him with Ebenezer Storer. While presiding over the Continental Congress, Hancock reluctantly turned over to a tutor 16,000 pounds sterling of the school's securities. The tutor had to sneak through enemy lines to return to Cambridge. And from time to time thereafter, Hancock gave back other notes as he ran across them.

Still Not Settled

But even as late as 1783, the Overseers reported that "it is not known yet what the late treasurer had received and paid." Hancock--by then governor of the Commonwealth--was enraged by this "indignity" and immediately switched his two sons from his alma mater to Yale.

Nevertheless, his conscience must have been bothering him, for he offered to build a fence around the Yard. He was thanked by a still untrusting University, which demanded he pay cash in advance for the fence.

Finally in 1785, the Governor acknowledged that he owed Harvard a balance of 1,054 pounds from his stewardship. He acknowledged it, that is, but died in 1793 without ever having paid a cent of it. Hancock's heirs, however, promised restitution and by 1802 had paid off the whole debt plus simple interest; yet the University is still out $526 of compound interest from its unfortunate appointment.

This settlement, of course, was only a minor irritation compared to the real problems of finance during the Revolution which were inherited by Hancock's successor. Treasurer Storer's faith and foresight led him to buy Continental Loan Certificates during these years of incredible inflation, and the Harvard history books single him out as one of the University's greatest heroes. Whether or not he saved the school from "hopeless bankruptcy," Storer's feat of raising the College's personal estate from $55,000 in 1777 to $182,000 some 16 years later was truly remarkable.

From then on, the rapid enrichment of the University paralleled that of the nation. While aiding the latter magnificently, Hancock had failed in his unintentional efforts to thwart the former. Harvard's investments climbed to over half a million dollars by 1830, to over a million by the outbreak of the Civil War, and to over ten million at the turn of the century.

While the University prospered along with and because of the growth in national income, in some few instances the progress of the young republic came at the expense of Harvard assets. Shares of the Charles River Bridge and the Middlesex Canal were written off as "Doubtful and Desperate Debt" after a free bridge was built alongside the one and a railroad was set up along the other. Neither the U.S. Supreme Court nor the Massachusetts Legislature would save the school from these losses.

At any rate, the College made more correct investment decisions than incorrect ones, and the phenomenal rise in assets can be attributed largely to the sound policies of University treasurers--all of whom have had professional experience in financial matters since the appointment of Boston merchant Thomas Brattle in 1693.

Faculty Isn't Consulted

Members of the University faculty have had little or nothing to do with investment decisions, although current treasurer Cabot does occasionally speak with Dean David and other Business School professors "on a highly informal basis." Except for one occasion when he asked the Medical School to check on a new "miracle drug," Cabot has relied almost entirely on the advice of his regular 30-man staff.

University treasurers have never been constrained by any standard Harvard investment policy but rather have been given freedom to follow their own whim and wisdom. Naturally under the Statutes, the treasurer "is required to submit his accounts, and all evidences of the property under his charge, to the committees of inspection appointed by the Corporation and Overseers severally, and to make annually to the Overseers a statement of the receipts and expenditures of the University."

The records prove, however, that the Treasurer is on his own, for there is a marked change in the Harvard portfolio with each new regime. Some of the switches, of course, were just signs of national trends to which all investors reacted similarly.

In the early 19th century, notes and mortgages predominated (60 percent of the total investment in 1831), but from 1850 on, they were rapidly replaced by bonds. Bonds, which were not even mentioned in the 1831 report, steadily climbed until they reached a peak of 73 percent of the portfolio in 1905.

From then on, their percentage began to drop slightly, but the only major change was in their composition. Public utilities and industrials which once dominated the bond total were slowly replaced by U.S. Governments in 1942. Today, bonds--half of which are U.S. Government--comprise about 44 percent of the University's investment total.

Declining along with notes and mortgages although at a much more gradual pace was real estate. Desiring to hedge against inflation, Treasurer Edward W. Hooper brought the investment fraction tier up in real estate to a high of two-fifths in 1881--the year he acquired the land now occupied by the downtown Jordan Marsh for $475,000.

Real Estate Falls Behind

But after Hooper's 22-year reign, real estate was rarely acquired, and today it makes up but one percent of the portfolio. One of the disadvantages of this type of holding is the difficulty of disposal. For over 50 years, the school has owned Bumpkin Island in Boston Harbor, and the best Cabot has been able to do is to lease it for 999 years for a total of $1.

Since real estate, note, and mortgage proportions declined while over-all investment totals were growing by leaps and bonds, the leaps were provided by acquisition of stocks in the 19th and 20th centuries.

Stocks, which accounted for only three percent of the total investment in 1831, today comprise about 55 percent. Preferreds, which at one time provided one-fourth of the value of the stocks, have been reduced by Cabot to about one-tenth.

While stocks as a whole were increasing in relative importance, the type purchased was also changing. In the 1830's, two-thirds of them were bank stocks--the rest in bridges and canals. Then two decades later, textile and railroad stocks began to outnumber and out-value the bank securities, and the bridges and canals were becoming obsolete.

Currently, railroads make up only five percent of the common stock total--one-fourth of which is in public utilities, one-fifth in oil, and one-tenth in insurance. Railroads are in fourth place behind these three leaders, and then come chemical, bank, retail trade, paper, electrical equipment, food and beverage, rubber, mining and smelting, farm equipment, and automobile stocks, in that order.

Public utility holdings have doubled under Cabot's stewardship mostly at the expense of chemical, retail trade, and bank stocks. In general, however, the percentages of these various categories of stock have remained relatively stable for several decades.

As of June 30, 1953--the date of the last report to the Overseers, the University's largest common stock holding at market value was $7,037,000 in Standard Oil Co. (N. J.). At that time, the school owned between two and four million dollars worth of Seaboard Airline Railroad, B. F. Goodrich, Christian Securities, General Electric, North American Co., International Paper, Hartford Fire Insurance, and General Motors.

Looking further down on the list, one realizes that when the Band played "Brush Your Teeth With Colgate" last fall, it was not only ridiculing the opposition but also advertising a company in which the University owned shares worth $1,377,000. And these in the stands who were simultaneously swigging from bottles of Hiram Walker were patronizing a firm in which Harvard's holdings equalled $1,663,000.

Ad Was Accidental

The Band's advertisement was entirely inadvertent, of course, and if the University were to place a large supply order with a company in which it held shares, it would be equally unintentional. Cabot firmly believes it is "much better that the purchasing agent doesn't know where the investments lie." To do otherwise "would be a mistake."

And just as the investment holdings have had no indirect effect on University policy, Harvard has not endeavored to have any direct effect on these companies except in the role of a minority stockholder. "We have never tried to assert control," reports Cabot.

On the other hand, the Treasurer bristles at the suggestion that the College is a more proxy-signer. He votes with the University's interest in mind at all times, and this does not mean that he automatically supports a company's management.

While making the investment decisions and voting the shares, Cabot rarely sees a security. "We only see them," he says, "when a man comes in to give some." Even then, the donor is hustled over to the New England Trust Co.--perhaps by subway or taxi depending upon the size of the gift.

Special Deal

The University has a special contract with the Trust Co., which keeps Harvard's securities in its vaults as well as collecting dividends and clipping coupons for the busy Treasurer. The latter job, by the way, undoubtedly involves countless man-hours, for the current market value of the school's bond portfolio approximates $130,000.000.

With the paper work done by outsiders, Cabot and his staff are able to spend all of their time in the study of investment prospects. In the last fiscal year, their research paid off to the tune of a 5.05 percent rate of return on the historical cost of investments, and in the year before that, the income equalled 5.08 percent--the highest in 20 years. During Cabot's five-year career, he has increased the General Investments more than $104,000,000, which is a phenomenal rise of over 50 percent.

While earning a 5.05 percent rate of return in 1953, Cabot paid into the endowment funds only 4.6 percent, with the remainder being set aside in an unapportioned income reserve. The percentage to be paid is announced in advance each year under a system devised by Henry L. Shattuck '01, one of Cabot's predecessors. The rate has climbed from 4.0 percent in 1945-49 to 4.2 in 1950, to 4.3 in 1951, and 4.5 in 1952.

Shattuck's procedure, which provides for building a reserve in good years and withdrawing from it in had ones, has two advantages. In the first place, it makes budgeting easier because of the previously announced and promised return, and secondly, the reserve fund relieves the pressure on the treasurer. As of last June, there was over nine million dollars in this unapportioned balance--just a few thousand dollars shy of the Treasurer's goal.

In analyzing Cabot's work, George Putnam Jr. '49 of the Putnam Management Co., states that the Treasurer has "followed the accepted Massachusetts Trustee Practice of maintaining a balance between good quality common stocks and high-grade fixed income securities." In conclusion, Putnam reports that the "Harvard Endowment Fund again stands as a tribute to skillful management."

Yet there is something illusory about the millions of dollars received in investment return, and Cabot is the first to admit it. For one thing, the huge numbers sometimes deter would-be benefactors from giving to an institution which they think--mistakenly--does not need the money.

Most important, however, is the fact that costs have risen greatly and that investment returns, which made up 64 percent of Harvard's income in 1845, today amount to only 26 percent. Currently, tuition comprises 22 percent, and "gifts for immediate use" account for another fifth.

"Soft Money"

Cabot refers to these latter gifts as "soft money," and while he is glad to have them, he points out that in these times, such donations are here today and gone almost before tomorrow. This is inevitable when investments provide proportionately only half the income they did in 1920 despite increases in both principle and rate of return.

Although declining steadily percentage-wise during the past 34 years, they are still responsible for over one-fourth of the school's funds. And even the briefest study of the history and current contribution of investments to the University proves that Harvard is not a Kremlin-on-the-Charles but rather a house that capitalism built and a house whose future is tied inextricably with that of its builder