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Saturday, 25 October 2014

Crimson face?

Harvard could get smarter about its endowment

Harvard University could get smarter about its $33 billion endowment. Jane Mendillo, who has managed the Ivy League university’s portfolio for six years, is leaving at the end of 2014. Her predecessor is partly to blame for crisis losses, but Harvard nevertheless seems to have overpaid for mediocre returns.

Mendillo arrived amid a whopping 27.3 percent investment loss in the year to June 2009, depleting Harvard’s coffers by $10 billion. Had the Crimson kept pace with the average U.S. university endowment, which slumped by 18.7 percent according to NACUBO-Commonfund data, the decline would have been $3 billion less severe. Mohamed El-Erian, who ran Harvard Management Co between stints at bond fund giant Pimco, shares the burden for Mendillo’s poor start.

Since then, however, returns have only been so-so. In the year to June 2013, Mendillo’s team generated 11.3 percent against a peer average of 11.7 percent. Over five years, which includes the start of the downturn, Harvard’s annualized return was just 1.7 percent, according to executive search firm Charles Skorina, the worst of 12 big schools analyzed and well under the 4 percent U.S. endowment average. Mendillo conspicuously omitted five-year performance figures from her last two annual reports, showing three-year data instead.

Harvard consistently beats its own benchmarks, though they don’t always look so challenging. For instance, the private equity sector target was just 10.6 percent for fiscal 2013. Mendillo’s 11 percent narrowly beat that but fell far short of public equity markets where the university had less exposure than other schools.

It is the so-called Yale model, however ironic given the natural rivalry between the two universities, which has dogged Harvard. The idea is to take advantage of a very long-term investment horizon to make illiquid investments in private equity, real estate and other areas that should theoretically outperform more easily tradable equivalents. It hasn’t worked in practice lately.

Meanwhile, Mendillo earned $5.3 million in 2011, according to Charles Skorina, easily exceeding her main counterparts elsewhere. On a simple measure of performance-for-pay, meanwhile, she ranks last among the dozen endowment bosses sampled. The comparatively high-pay habit dates back at least to El-Erian’s predecessor, Jack Meyer. As Harvard seeks a new investment boss, less of both Yale model investing and Wall Street compensation may be in order.

Readers' comments (2)

  • It's perfectly ridiculous to accuse El-Erian to "share the burden for Mendillo’s poor start" as the years of Mendillo's tenure have been a steady uptrend while El-Erian had to cope with the most severe market downturn in almost a century.

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  • Thanks for the comment. The view makes clear the comparison is relative to other endowments. Mendillo took the job in July 2008, so the brunt of the crisis damage was to the allocation already in place. Since the hit was so much worse than for other endowments, her predecessor must have got something wrong.

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Context News

Jane Mendillo plans to step down from her role as president and chief executive officer of Harvard Management Co at the end of 2014, Harvard University said on June 10.

Mendillo, who worked at HMC before spending six years as chief investment officer of Wellesley College, rejoined the Harvard endowment in 2008 and saw it through the financial crisis and subsequent organizational changes.

Harvard has the biggest U.S. university endowment at $32.7 billion as of June 2013. It lost 27.3 percent, or $10 billion, in the year to June 2009. It returned 11 percent and then 21.4 percent in the next two years, was close to flat in the year to June 2012 and made 11.3 percent in the 12 months to June last year.

The average return for around 800 institutions tracked in the NACUBO-Commonfund Study of Endowments was a loss of 18.7 percent in fiscal year 2009, a gain of 11.9 percent, then 19.2 percent, a 0.3 percent downturn in fiscal 2012 and a gain of 11.7 percent in the year to June 2013.

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