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Poison ivy

23 Sep 2016 By Richard Beales

Harvard University is struggling with post-graduate life. Its giant endowment lost 2 percent in the year to June, falling short of its own yardsticks and the 3.4 percent gain generated by David Swensen at rival Yale. More than a decade after the departure of its architect Jack Meyer, Harvard Management Co is finding it hard to get past being the sort-of hedge fund it once was.

The $36 billion under its care represents the largest fund in the country of its kind. Performance has lagged of late. The past year’s effort missed Harvard Management’s own blended benchmark return of 1 percent, roughly what neighbor Massachusetts Institute of Technology managed with a pot about half the size.

In his 15 years at the helm, Meyer helped turn the Harvard endowment into something like a hedge fund, with teams inside the organization managing funds directly as well as farming out money to external investment firms. His track record was strong, but it came with unsustainable levels of pay as well as organizational challenges.

After the unexpected departure in July of Stephen Blyth, who was in charge for just 18 months, Harvard is looking for its fourth fund boss since Meyer left in 2005. Its touted “hybrid” internal-external model requires overseeing at least 200 employees, executive search firm Charles Skorina estimates, on top of the investments themselves. Skorina says no other big endowment employs more than 70. Yale, which distributes its $25 billion among outside managers, gets by with only about 30 people.

The Harvard fund’s annual report refers to a reduction in the in-house equity management team and to deeper partnerships with outside managers. That suggests the existing model may on the way out. Both internal and external equity holdings underperformed last year. Indexed investments would have done better. A focus on selecting the best outsiders, without the distraction of in-house portfolios, could improve that.

After all, the new Harvard endowment boss will have plenty to worry about: the challenges of investing such a big endowment, the low-return market environment, and setting clear long-term goals. The aim, perhaps, should be to achieve something steadier – something, perhaps unthinkable in Harvard Yard, more like Yale’s 31 years with Swensen.


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