For more than a decade, investment officers at Yale and Harvard have used vastly different management strategies to keep their institutions in the top 1 percent of university endowment returns. But financial experts said Harvard investment officials are contemplating a switch to a plan resembling that of Yale.
Harvard Management Company President Jack Meyer said last month that at the end of the current fiscal year in June, he will leave the company with four of his top managers to create his own hedge fund. With this vacancy, Harvard administrators must decide whether to maintain the company’s current model of in-house investment management or move toward an external system, modeled after the one championed by Yale Chief Investment Officer David Swensen and endorsed by Yale and many other peer institutions.
With Swensen at the helm, the University has delegated the majority of its endowment management to outside investment firms. But the HMC, a technically independent firm owned by its namesake university, has managed the bulk of Harvard’s investments itself since 1973. Harvard and the University of Texas are the only two major institutions in the nation which earn endowment returns comparable to Yale’s and do not manage the majority of their funds externally, John Griswold ’67, the executive director of the Commonfund Institute, said. Griswold said Swensen became known for popularizing the external management plan in the late 1990s. The Commonfund Institute is the educational arm of a group which provides fund management and investment advice to many universities.
“The big shift was over the last five years,” Griswold said. “Most endowments have now outsourced their management primarily, but what David Swensen has shown is an incredible talent for choosing managers while diversifying his portfolio and minimizing portfolio risk. He’s tried to find opportunities where others have not gone yet, and if you look across the board, that’s how successful investors have done it.”
Yale’s endowment of $12.7 billion is a distant second to Harvard’s $22.6 billion endowment, the largest of any university in the nation. Still, for the fiscal decade that ended on June 30, 2003, Yale’s average base investment returns of 16 percent ranked first among the nation’s private higher education institutions, while Harvard’s average returns ranked third at 14.7 percent, according to HMC figures.
Competition aside, Griswold said Harvard can afford to keep its options open. But Griswold, who estimated that Yale manages about 15 percent of its endowment internally, said the HMC may well follow Swensen’s lead.
Griswold also lauded Meyer’s success in using the opposite approach at Harvard, where he said the university’s diverse portfolio required delicate leveraging. But he said consistent complaints about HMC managers’ high salaries, which he named as a potential cause of Meyer’s departure, were also concerns Harvard administrators should keep in mind during the HMC reconstruction.
Some Harvard alumni have argued that Meyer and his employees have been overcompensated in recent years. William Strauss, one of seven Harvard graduates of 1969 who have petitioned the university to set stricter limits on HMC salaries, said Meyer’s departure offers the institution a chance to reevaluate its priorities.
“Now is a good time for Harvard to take a look at how the entire endowment is managed,” Strauss said. “It’s been our contention all along that the endowment is for the benefit of the students, not for the benefit of the employees who use it.”
Griswold said the high HMC salaries were necessary to keep top investment managers from leaving for more profitable jobs on Wall Street, but Strauss said university endowments should be used to freeze tuition and pay down rising student debts.
“Since we were in college, the cost of attending Harvard has grown by two and a half times, adjusted for inflation,” Strauss said. “Tuition inflation is outpacing national inflation. We think that needs to stop at Harvard, and we think the same thing should take place at Yale, Princeton, Stanford and everywhere.”
Harvard spokesman Joe Wrinn said the evolving structure of the HMC was not the university’s primary concern.
“Our goal and focus is to hire a new director,” Wrinn said. “That is where our energies are dedicated.”