Letter from the US: Endowment rethink
Should other university endowments follow the Yale model or is it time to rethink how they invest and take a simpler approach, such as an indexed 60/40 portfolio? That is the big question for NP ‘Narv’ Narvekar, who becomes the CEO of Harvard Management Company (HMC) in December.
Narvekar is the fourth CEO in the last decade for the $35.7bn (€32bn) endowment of the world’s wealthiest university. The previous incumbent, Stephen Blyth, resigned in July after only 18 months. Under his leadership, HMC lost 2% for the fiscal year ending 30 June, its worst performance since 2009, when it lost 27.3%.
Harvard’s returns have been quite poor for the past decade at 5.7% on an annualised basis, compared with 6.9% for a 60/40 portfolio of domestic equities and bonds, according to Wilshire Trust Universe Comparison Service. Over five years, the difference is even greater, with Harvard coming in at 5.9% and the US markets delivering an annualised return of 8.9%.
What is most annoying to HMC’s executives is the comparison with rival Yale, whose $25.4bn endowment posted 3.4% growth for fiscal year 2016. Since fiscal year 2006, Yale has outpaced Harvard every year except for 2008 and 2010.
When Blyth took over in 2015, he hung a ‘Yale Sucks’ shirt in his office, pledging to return the endowment to the top of its class, while keeping faith to the ‘hybrid’ investment model designed by Jack Meyer, HMC’s CEO from 1990-2005. Hybrid means part of the money is given to outside managers, and part managed in-house, with active trading in stocks and bonds and additional investment in real estate.
During his tenure, Meyer succeeded in outperforming the market, rewarding the in-house managers with compensation that was competitive with salaries in the hedge fund industry. “The problem actually began with Harvard doing too well, meaning they made too much money and they paid their managers $10m, $20m, $30m a year,” according to Tim Keating, president of Keating Wealth Management in The Harvard Crimson, a daily newspaper. He added: “At a place as liberal as Harvard is, that made people go crazy, especially the faculty.”
Criticism of HMC compensation grew stronger and a group of alumni sent a letter to then University President Lawrence Summers denouncing the salaries as excessive. Eventually, in 2004 the university placed a “significant” cap on HMC executive salaries. That was the beginning of the end because HMC could no longer hire the best managers.
A year later, in 2005, Meyer resigned, taking four top-paid senior managers with him. Since then, HMC has had four CEOs: Mohamed El-Erian (2006-07), Jane Mendillo (2008-14), Blyth and now the newly appointed Narvekar. Blyth tried to revive performance by hiring former Goldman Sachs partner Michael Ryan to oversee stock investments. The results were not brilliant – Ryan’s direct equity group lost more than $200m in the last fiscal year, according to the Wall Street Journal. Eight traders were fired last May and Blyth took a medical leave of absence before departing in July.
Narvekar must decide whether to embrace the Yale model, developed by David Swensen, who has been Yale’s CIO since 1985. Swensen is famous for outsourcing nearly all assets, mostly to hedge fund and private equity managers. To follow his strategy would imply cutting many of the 200-strong HMC staff. The Yale Investment Office, by contrast, employs about 30 people.
Narvekar joins HMC with a solid track record, having been Columbia University’s investment chief since 2002, achieving an annualised 10.1% return for the 10 years ending in June 2015, one of the best performances among Ivy League universities. He adopted the Yale style of investing, but he also executed some internal hedging of the portfolio. Under his leadership, Columbia’s endowment grew from $4.3bn to $9.6bn. Before Columbia, Narvekar was a managing director at the University of Pennsylvania’s endowment.