After a decade of unsatisfying endowment returns, the Harvard Management Company is reconfiguring its methods to align more closely with those employed by its counterpart at Yale.
In the ten years leading up to 2016, Harvard’s endowment saw an annualized return of 5.7 percent — a figure well below the university’s 8 percent expectation and the 8.9 percent return on the US 60–40 mix of stock and bonds, a traditional low-risk portfolio often used as a market indicator.
In a September letter to the Harvard community, HMC President Nirmal Narvekar, who was chief executive officer of Columbia University’s endowment before joining Harvard in December 2016, vowed to tackle the organization’s “deep structural problems.” He promised to outsource most investments to external managers and to take up a generalist model where staff are compensated based on the entire team’s performance. Both these new approaches have long been key features of what is commonly known as the Yale model. The model was developed by David Swensen and Dean Takahashi, who have led Yale’s investment office for the past three decades.
“Yale has a process for locating and identifying what they feel are good investments, but Harvard’s essentially starting from scratch again with Narvekar,” investment executive recruiter Charles Skorina said.
While Harvard has historically had a larger endowment than Yale has, the gap is quickly closing. On June 30, 2007 Harvard boasted a $34.9 billion endowment while Yale held a $22.5 billion endowment. Ten years later — following two major economic recessions — Harvard’s endowment had increased by just 6 percent, now totalling $37.1 billion, while Yale’s had increased by a full 21 percent, coming in $27.2 billion.
Swensen and Takahashi have been working on Yale’s endowment investment strategies for thirty years, but the leadership of HMC has been in constant flux since former president Jack Meyer left his job in 2005, after 15 years of service. Between 2005 and 2016, three different people sat at the helm of HMC.
Roger Ibbotson, a hedge fund manager and Yale School of Management professor, said changing leaders and, with them, strategies may cause “distortions.”
“When you have a chief investment officer who is steering the ship and implementing a number of different investment ideas, themes and exposures he or she believes in, you want to make sure their tenure is long enough to see those investments through,” said Michael Chase, a partner at consulting firm Fiduciary Investment Advisors who is familiar with Narvekar’s work.
Even though he has never worked at the Yale Investment Office, Narvekar is said to share the University’s investment philosophy.
“Generally the model that Yale thinks it’s best to use is to use outside money managers,” Chase said. “And Narv has kind of grown up in that same school of thought. He was doing the same thing when he was at Columbia.”
Investment experts interviewed by the News detailed a variety of reasons why using only external money managers is a good investment strategy.
For one thing, external money management gives endowment officers more flexibility, Ibbotson said.
“It’s harder to fire [an] old team whereas you can easily fire [a] manager team,” he explained. “It’s harder to be unbiased when you judge them when they are your next-door neighbors.”
According to Chase, outsourcing money management better aligns with the interests of money managers, who prefer greater access to clients and the opportunity to grow their portfolios rather than taking directions from the chief investment officer. He added that the benefits of external money management outweigh the cost of any extra service fees.
Using external money managers also better allows for the adoption of a generalist model, which aligns compensation for in-house staff with team-wide results. Such a model generates more camaraderie among staff and promotes discussions across asset classes, according to Chase.
“It’s bad morale when you have such star professors who are paid much less and who also see sometimes mediocre performance [of the endowment],” Skorina explained.
Because luck plays an important role in investment results, Ibbotson said, staff should not be compensated based on the performance of just their assigned part of the portfolio. He added that models based on individual performance can lead to paying some staff huge compensations even if the endowment sees poor overall returns.
According to Skorina, it may take three to five years for Narvekar to reset Harvard’s endowment portfolio.
“You don’t just wave your hand and change investments. You have to look at the contract that you signed for each investment,” Skorina said. “When you have the money out, you have to have something new to invest it in, and that takes work and efforts.”
Kevin Quirk, a principal with Deloitte Consulting, said Harvard’s restructuring reflects a broader trend in the endowment industry to rethink investing practices.
According to Quirk, between the 1980s and early 2000s — when Harvard initially rose to prominence for its endowment investment — the market environment was far more “friendly” than it currently is.
“What has happened since the financial crisis is an existential self-assessment of many endowment structures and teams,” Quirk said.
He added that the current capital market — with its rising interest rates and hard-to-come-by valuations — presents significant challenges for endowment investors.
Still, Chase said he is hopeful that Narvekar will reinvigorate Harvard’s endowment.
“Narv has a very good track record,” Chase said. “[He] has the capability that is needed to realign what their objectives are and make sure their portfolios get them where they want to be.”
Jingyi Cui | jingyi.cui@yale.edu