President Jack Meyer ended his career at Harvard Management Company on a high note last month, producing a 19.2 percent return on the University’s endowment this past year. But these earnings may be a swan song for Harvard’s current management strategy, which discloses salaries for most investment managers.
Meyer’s departure ends a 15-year reign during which he helped expand Harvard’s wealth while coming under attack for overpaying his managers. In light of that criticism, Harvard is rethinking the risks of investing mainly through an internal staff. Most other universities, including Yale, outsource the majority of their investments to external managers whose compensation is hidden from the public. Some Cantab alumni said they are concerned that a shift to external management could shield inappropriately high compensation rates from public scrutiny.
Harvard’s investments are controlled by Harvard Management Company, a semi-autonomous organization owned by the university. HMC sets its own compensation rates, but because it is part of a nonprofit organization, it must by law disclose manager compensation — as high as $35 million for one manager in 2003 — to the public. The 2003 disclosures prompted a group of Harvard alumni to launch a highly publicized campaign against exorbitant payments. The university placed a cap on maximum compensation for fund managers in March 2004.
John Griswold ’67, executive director of the university investment research group Commonfund Institute, said he suspects that the criticism led to Meyer’s departure.
“Clearly the Harvard model has led to where they are now, which is finding a replacement for Jack Meyer,” he said.
But Harvard spokesman John Longbrake said Meyer left his post in order to launch his own investment firm.
While HMC invests most of its money through internal managers, Yale and other universities generally outsource their investments to firms on Wall Street, out of the public radar. Griswold said he expects Harvard to shift to a primarily external system similar to Yale’s.
“Harvard seems to be abandoning its strategy of hiring very talented, very expensive managers to manage the money internally,” he said. “They’ve been forced by political and other reasons to change that management structure.”
The internal share of Harvard’s investments has already dropped from 80 percent in 1990 to nearly 50 percent this year. The HMC board and Meyer’s successor — who has yet to be chosen — will determine future internal-external ratios. But Longbrake said the school will not completely abandon its hybrid arrangement.
“Harvard’s system is unique in terms of the fact that we are managing a large portion of our endowment internally,” he said. “That’s worked very well for us over the last decade in terms of costs and returns, and we are committed to maintaining that system.”
If Harvard does switch to a more external system, Griswold said, it faces several disadvantages with its competitors. The Cantabs’ endowment is the highest in the nation at $25.9 billion, dwarfing Yale’s second place $15.2 billion. Griswold said Wall Street’s top fund managers limit the new money they accept, which would force Harvard to place much of its wealth in the hands of potentially less talented external investors. Harvard’s internal staff would also have to acquire new skills as it shifted from managing finances to overseeing other managers, he said. As a result, Harvard is unlikely to match Yale’s recent endowment growth, which reached 22.3 percent last fiscal year, Griswold said.
“If you have a successful formula, any time you change that there’s the risk that you’re not going to have the same performance,” he said.
Meyer took a chunk of HMC with him when he left at the end of September, drawing 31 staffers to his new private practice. His firm will continue to manage up to $500 million worth of Harvard’s endowment, Longbrake said. But Meyer’s compensation will be confidential.
David Kaiser, a Harvard alumnus who co-wrote the original 2003 complaint about compensation rates, said Meyer is continuing a trend of Harvard managers forming private practices away from public view.
“We really have no idea what, if anything, will change as a result of Mr. Meyer’s departure,” Kaiser said. “Very similar arrangements may continue and simply be removed from the public eye.”
Kaiser said maintaining Harvard’s primarily internal system while decreasing its cost would be the most responsible choice for the university. He cited Yale Chief Investment Officer David Swensen — who is employed internally to oversee Yale’s outsourcing process — as an example of a highly successful but more moderately compensated administrator. Swensen earned $1.15 million in 2004 compared to Meyer’s $7.2 million.
But Griswold said attracting top managers to any university requires paying them rates comparable to those of Wall Street investment managers.
Longbrake said the HMC board will not likely make significant changes to manager compensation rates.