Despite Harvard’s endowment returns lagging behind its peers in recent years, a 2015 internal review leaked to Bloomberg News suggests that the school’s investment office had set performance targets low enough to ensure high pay for some of its managers.
Conducted by the consulting firm McKinsey & Company and reported by Bloomberg last Thursday, the review provided a candid analysis of Harvard’s investment office. The consulting firm’s findings underscored the challenges of setting appropriate benchmarks to assess the performance of university endowments such as Harvard’s and Yale’s, because of their investments in assets whose value cannot be measured as frequently as publicly traded stocks and bonds.
The review analyzed Harvard’s performance between June 2009 and June 2014.
“It has become conventional for investment managers to use some kind of index to see how they are doing in relative terms,” said William Jarvis ’77, executive director of the Commonfund Institute, an institutional-investment advisory firm. “The challenge comes when you have less liquid portfolios with assets like real estate and private equity — then you have to start creating less conventional benchmarks that might cause some disagreement.”
Since assuming their roles in 1985, University Chief Investment Officer David Swensen and Senior Director of Investments Dean Takahashi have pioneered a strategy that places a significant amount of the University’s endowment in less conventional assets. Yale’s annual endowment update for fiscal 2015 indicates that more than half of the endowment’s then-$25.6 billion market value was allocated in illiquid asset classes, including natural resources, real estate and venture capital.
While such investments have delivered high returns for the endowment — the University’s venture capital investments have earned about 93 percent on average annually between fiscal 1995 and fiscal 2015 — Yale faces the same challenge as its peers in assessing the relative performance of such investment strategies.
At Yale, the Investments Office regularly reviews asset class benchmarks. Any changes recommended are put before the University’s investment committee, which oversees the office’s activities.
“It is very difficult to select an appropriate benchmark in certain asset classes,” said economics professor and Nobel laureate Robert Shiller. “There is not always a clear best standard, and endowment managers can justifiably reach different conclusions about what is appropriate in their individual cases.”
Hedge fund manager and School of Management finance professor Roger Ibbotson said that even the best benchmarks can only provide a limited assessment of annual performance over the long duration of a market cycle.
“Because these are investments designed to perform over market cycles that last many years, assessing performance in relation to annual benchmarks will not provide an accurate picture in most cases,” Ibbotson said. “Determining annual compensation packages based on outperforming benchmarks becomes quite a challenge then.”
Ibbotson also noted that the structure of an investment office like Harvard’s — which employs both external and internal fund managers — can exacerbate the problems associated with benchmark selection. Compensation packages for internal employees can be much higher in Harvard’s “hybrid” model of hiring internal and external managers.
Unlike Yale’s endowment, a vast majority of which is invested by external money managers, much of Harvard’s $36 billion endowment is managed internally. Many employees of Harvard’s office received large salaries for having outperformed internally designated benchmarks in the years under review by McKinsey.
Tax filings from fiscal 2009 to fiscal 2014 show that Harvard paid its investment office’s top 11 internal managers nearly a quarter of $1 billion in the five-year time period. At Yale, compensation for the top investment office employees across the University over the same period did not cross $100 million.
Part of the difference between Yale’s and Harvard’s compensation payouts can be attributed to Yale paying a greater proportion of costly fees associated with investment management to external managers, according to Ibbotson. But the McKinsey report also noted that Harvard had less demanding benchmarks for asset performance than Yale, Princeton or Stanford.
While Harvard had beaten its benchmarks for the report’s five-year period by 1 percentage point, McKinsey analysts noted in their report that if Harvard’s performance had been measured by the same benchmarks in use by Stanford’s investment office, Harvard would have underperformed by 0.5 percentage points.
Correction, Jan. 19: An earlier version of this article incorrectly compared endowment performance benchmarks at Yale and Harvard.
Annie Wang ’13, when reached over the phone, was breathless and effusive in praising her colleagues and her work as an analyst at the consulting firm, IMS Group. This time two years ago, however, Wang was in a very different place, admitting she didn’t “really know anything about consulting,” let alone her future place of employment.
When Wang entered Yale as a freshman, she, like many other Yalies, thought she had every facet of her future mapped out.
“I was going to go to medical school and then be a doctor,” she recalled, adding that even in high school, she had considered medicine as her inevitable career. Halfway through college, however, it dawned upon her that any interest she may have had in organic chemistry or the pre-med track had completely dissolved. Abandoning the largely predetermined academic track that she had made as an ambitious freshman, Wang became a history of science and medicine major. Although she was still interested in health care, she wasn’t sure what exactly she wanted to do or how she could work in the industry after graduation.
In her junior year, she decided, on a whim, to apply to a number of consulting firms and investment banks. Wang explained that despite not knowing that much about finance and consulting, she applied because “everyone at Yale always talks about how they’re such great places to work.” Although she did not extensively prepare for the interviews — “I struggled in my first interviews because I wasn’t very familiar with the idea of case studies” — Wang received offers from a number of firms before ultimately settling on the IMS Consulting Group, in part because the firm specialized in health care and pharmaceutical consulting.
“I sort of kinda stumbled into consulting,” she said.
When Brandon Fu heard this story over the phone, there was a long silence punctuated only by a wistful sigh.
“That’s incredible,” he finally murmured in disbelief. After regathering his composure, Fu, a senior at the University of California, Santa Barbara, explained his surprise. “Everyone wants to work for one of those companies [a finance or consulting firm] but almost no one makes it,” he said, adding that students hopeful of joining an established investment bank or consultancy in New York or Chicago must begin preparing their applications from the day they step on campus as a freshman.
“It’s kinda like getting into Yale from high school,” he said, stating that a student at UCSB who wants to work at Goldman Sachs must have a perfect resume, with no room for sophomore slumps or the like. Fu said that firms often dismiss schools such as UCSB as “party schools”and expect more outside the classroom from “non-Ivy or elite” applicants like himself.
“Firms think that pulling a 4.0 is so easy at UCSB that I must also have had the time to do something amazing outside the classroom,” he complained, asserting that his classes are often as challenging as those of his friends who go to more prestigious schools such as UC Berkeley and Stanford.
Yet Fu knew his dream of reaching a job at Goldman Sachs or McKinsey & Company was unlikely even before he matriculated at UCSB. Rejected by several of his top choice colleges, including USC and Columbia University, as a high school senior, Fu vowed to do everything he could at UCSB to remain a competitive applicant for a career in consulting or banking. In order to begin crafting “the perfect financial profile,” Fu double-majored in economics and accounting, majors he described as boring, but “employable.” Although Fu was an avid baseball player in high school and wanted to join a social fraternity at UCSB, he knew that he wouldn’t have the time in college for either pursuit. Rather he joined Alpha Kappa Psi (AKPsi), a business fraternity at UCSB which, according to the fraternity’s website, seeks to improve the professional success of its members “by operating the fraternity along the lines of a ‘corporation.’”
Upon reflecting on his fraternity’s creed — something that is starkly different to the creeds of brotherhood and friendship upon which any of Yale’s six fraternities are founded — Fu noted in a matter-of-fact voice that his college experience isn’t completely dissimilar to working for a corporation. Beyond his double major and his business fraternity, where he is the Vice President of Alumni Relations and Membership, Fu juggles two local internships with an investment bank, and a logistics and supply corporation.
“I go to school just like you go to work. You sort of just hang in there and get by, waiting for the next promotion or, in my case, an exit opportunity.”
Despite four years of preparation and relevant job experience, Fu wasn’t able to crack into the consulting or investment banking industries. Although he’s happy with the offers he has received from accounting firms in California, he speculated that had he gone to a school with a bigger brand name like Yale, he would have been more successful in finding a finance job on the East Coast.
“I hoped banks would see that while I may not have gone to a school like Yale or Stanford, I did everything I could to prepare myself for a career in finance and that I’d do very well in that job,” Fu said, adding that the competitiveness of the process means he’s competing with equally dedicated students who are building the same financial resumes but at more illustrious schools.
Like Fu, Kirsten Schnackenberg ’15, a former staff reporter for the News, entered college knowing that she wanted to work in either finance or consulting. And like Fu, Schnackenberg thought her career aspirations would require her to major not only in history — a subject that she loved studying — but also in economics.
But unlike Fu, Schnackenberg went to Yale.
After working at JPMorgan the summer between her sophomore and junior years, Schnackenberg recalled that although she did meet fellow interns who did not come from a “target school” — one of the elite universities that top finance and consulting firms regularly visit and encourage students to apply — they were often different from the students who did come from schools such as Yale and its Ivy League peers. Schnackenberg said that students who come from large state schools such as Ohio State tended to be finance majors near the top of their class, with resumes and extracurriculars tailored specifically toward finance and consulting. The majority of Ivy League students, on the other hand, majored in the humanities and pursued extracurriculars that they were passionate rather than prioritize the perceived “ideal” traits for a finance interview.
Stefano Malfitano ’14, an economics and math, and humanities double-major, said that nearly every student he met at Goldman Sachs as an intern last summer was either an economics major or a STEM major. Malfitano said that while these disciplines are not relevant to investment banking per se, prestigious firms receive so many applications that their Human Resources departments resort to convenient measures for filtering prospective applicants.
“They automatically take out a number of applicants based on cutoffs such as GPA or major,” he said, adding that most firms’ HR departments think that majors such as English or history are not sufficiently rigorous. “There is a belief that graduating with very high grades from a state school with a degree in English is not very difficult,” he said.
Malfitano said that these automatic cutoffs do not apply to schools such as Yale partly because Wall Street knows Yale so well. The strength of the liberal arts education at Yale is so well-known, said Malfitano, that students with degrees in English or American studies are considered in a way that they wouldn’t at a less prestigious school.
Undergraduate Career Services Director Jeanine Dames said that Yale’s extensive alumni base on Wall Street “acts as an incredible internal advocate” for current undergraduates. She added that many firms on Wall Street often ask their own Yale graduates to interview and recommend which current Yalies their firm should hire. As a result, while no one at Citigroup may be familiar with the strength of Ohio State’s African-American Studies Program, everyone there is confident that any Yale graduate, regardless of what he or she majors in, is intellectually prepared for the job.
All eight students and alumni interviewed by the News who have worked in finance and consulting and have majored in the humanities said that their majors were never considered a hindrance in the job hunt.
Schnackenberg said that if anything, her degree in history was advantageous during the interview process, as she was able to speak of how a liberal arts education helped her think critically and creatively. Additionally, and perhaps more importantly, it allowed her to differentiate herself from the many economics majors both at Yale and across the broader applicant pool.
Ethan Karetsky ’14, who will find himself at Bain next fall, echoed this sentiment. An American studies major. Karetsky said his major was simply what he wanted to study, not what he wanted to do. “People are much more than their major,” he added. Karetsky said Bain values people who think differently and admitted that no one asked about his major during his interviews.
“It didn’t seem important to them,” Karetsky said.
It’s an attitude that pervades nearly all corners of the Yale undergraduate experience, but one that is virtually foreign to college students outside of Yale’s brass gates. For Reilley Keane, a senior studying electrical engineering at Villanova University, college was the opportunity not so much for the holistic experience Yalies seem to experience by default, but rather a means to an ultimate end: employment.
“Do I wish that I pursued something I loved? Of course, but I’m finding the job market tough enough now as an engineering major,” he said, adding that he couldn’t imagine cracking the consulting market as a liberal arts major from Villanova.
While Yale students and professors continue to laud the value of the humanities, Harvard seems to be shifting its tone. A Nov. 8 editorial in the Crimson encapsulates this new chord, with the Crimson staff praising the perceived decline of humanities across American colleges. “We’re not especially sorry to see the English majors go,” proclaimed the editorial staff. It’s an attitude that might not bode well for the future quality of the Crimson, but the staffers’ sentiment is not unfounded, with national trends indicating a deepening decline in appreciation of the liberal arts.
The Crimson article reflects a student body losing faith in the career value of a liberal arts education, instead placing greater emphasis on the pragmatic skills gleaned from non-humanities disciplines. And Harvard is not alone in the pool of elite universities with this mentality: As reflected in a recent New Yorker article, Stanford is among the most recent string of upper-echelon universities aggressively attempting to “professionalize” its undergraduate experience. Along with providing selected student start-ups university endowment funding and offering three times as many entrepreneurship classes as Yale, Stanford recently changed its logo to something more aesthetically compatible with the iPhone. The old logo was designed for print and stationery, said one Stanford administrator; the new mark is more appropriate for a digital world.
Stanford history professor David Campbell ’80 said the influences of Silicon Valley undoubtedly permeate student life in Palo Alto. When Cardinals look at the school newspaper and see another Stanford student who just reached billionaire status from another technological endeavor, a culture of hopeful followers is not far behind.
“We’re in Silicon Valley so we’re surrounded by the ideology against which our students should push back,” Stanford history professor Denise Gigante ’87 said. She continued, adding that the culture in today’s tech environment has caused students to fear a separation between market value and life value.
“It’s the same ideology that tells them they need to be afraid,” she said.
Back in New Haven, Andrew Craig ’14 isn’t too worried. With a strong interest in music and performance, Craig entered Yale believing he wanted to study theater, but soon switched and remains committed to the film studies major. Because of these changing interests, Craig said he placed a heavy premium on the freedom that Yale’s education affords. While Craig does not know what life postgraduation will look like, he derives the success of his Yale education from the privilege offered by a liberal arts degree.
“I definitely think having that liberty is an enormous privilege,” Craig said. “And not everyone is able to access that privilege. It’s huge. It’s an enormous blessing. There are people all over the state — all over the country — who don’t have that.”
Many other Yale professors and students interviewed remain similarly unfazed by the thought that their humanities degrees would not be applicable in the job market. Professors and students alike asserted that the skills learned while pursuing a classics, history, english or humanities degree are highly transferable, no matter the prospective field.
The ability to think critically, ask good questions and problem solve are highly applicable in the consulting world, said english professor Pamela Schirmeister ’80 GRD ’88. And despite a decline in the number of humanities majors at Yale, professors like Schirmeister are unconcerned that many of their students choose fields outside of their majors’ direct relevance, such as academia. Beverly Gage ’94, the director of undergraduate studies, echoed this lack of concern, noting that the purpose of the History Department is not merely to produce hundreds of historians.
In fact, at least for now, Schirmeister seemed to prefer that her students not pursue careers directly associated with the liberal arts degree and instead experiment in the world of Wall Street. Ultimately, it’s “so much the better if they then go into the financial services industry,” she said. “Perhaps if more of them did, that industry wouldn’t be in the trouble it is.”
But others at Yale remain unconvinced, expressing a deep concern at the lack of continuity between the undergraduate and post-graduate levels in the humanities. English professor David Bromwich ’73 GRD ’77 admitted that fewer of the best undergraduates who major in literature chose to go into graduate study. Instead, the bleak job market has caused a harmful change in focus.
“Education is good in itself. If it has meant anything to you, it won’t support a theory of life that says we must pass from being penniless and thoughtful at 20 to being dull and prosperous at 40,” he said. “Are there really people who think, ‘When I was in college, I loved Tolstoy, Joyce, and Woolf, but now that I’m working for McKinsey I only have time for Twitter?’”
Nathaniel Zelinsky ’13 earned a history major and is now pursuing a higher degree at Cambridge University. Zelinsky said while he began as an economics major, he slid away from the department and found history to be his calling. Zelinsky laughed as he described the feeling of joy when ruffling through old papers, adding that a historian occupies a position of power.
However, his tone shifted when he began speaking of Wall Street careers and on-campus recruiting. Zelinsky lamented that a lack of “pastoral guidance” from the University allows students to fall back into old patterns of pre-established routes to success.
Gage echoed Zelinsky’s remarks, saying she would like to see a wider range of professions actively recruiting on campus. While she said a history degree teaches students to think broadly and ask questions, she admitted some history majors go into consulting because that is who is on campus.
Zelinsky claimed that so many humanities majors pursue careers in consulting and finance because these paths allow them to ignore fundamentally difficult questions like: “What is the purpose of my education?” or “What is my obligation to society?”
“A lot of my classmates in finance are not really doing anything useful for American society,” he said. “[For those] who go into finance and banking, it’s utterly and completely wasting the $500,000 it took to educate them.”
Like Zelinsky, Matthew Shafer ’13 is pursuing a graduate degree from Cambridge University. He is a Gates Cambridge Scholar working towards a master’s degree in political thought and intellectual history. In an email to the News, Shafer emphasized his love for writing, teaching and conducting research. He said his passion for history was also a consequence of its ability to positively impact the world.
Still, Shafer criticized the increasingly inevitable link between High Street and Wall Street. While he conceded that many students go into the financial sector for legitimate reasons, Shafer found the influences of the banking, consulting and business sectors to be detrimental.
“The fact that there’s basically a direct pipeline from America’s most prestigious universities to America’s most powerful corporations should make us re-examine many of our assumptions about whether or not elite education is, by itself, an automatically good thing for society,” Shafer said.
“What do you love about college?”
It’s a simple question, but one that can trigger nearly every Yale student into a stream of gushing recollections. For the math major, it might be an introductory philosophy class he took Credit/D/Fail. For a history major, it might be the international relations conference that nearly fell through last minute.
But when both Keane and Fu were asked this question, a flurry of awkward gaps and start-stop sentences ensued. For both of them, college was not an end in itself, as Yalies are so wont to view their undergraduate years, but rather a four-year audition for lofty, prestigious and well-paying jobs.
“I entered college committing to a rigorous major I didn’t like,” said Keane, adding that the challenges and numerous requirements of the major prevented him from taking classes in religious studies or theology, the one subject that he had always secretly wanted to study. Other than his fraternity — something he admits was only a time commitment during his freshman year — Keane mostly hangs out with other engineering students. It is with those students that he tackles problem sets, goes out on weekends and discusses the ongoing job hunt. Keane can’t remember the last time he discussed philosophy or history with friends, but if he had to guess, it would probably have been in high school.
As professor Charles Hill explained when he hears these stories, the strength of the undergraduate experience at Yale lies in its steadfast commitment to the liberal arts and the humanities. Hill said that Yale’s commitment is an increasingly rare one as more and more of Yale’s peers are changing directions.
“Everyone, especially Stanford, is becoming more vocational, more focused on training than educating,” said Hill, who is also a senior fellow at the Hoover Institute at Stanford, adding that “Stanford has become Stanford Tech” because its students are increasingly forsaking a liberal arts education for a narrower and more scientific curriculum.
As more universities shift towards professionalizing their curricula and undercutting the humanities, Hill said that more students and the media are adopting a misguided view that the humanities are a luxury that can be trimmed during economically difficult years. Hill believes that students armed with a strong understanding of the humanities are, in fact, better equipped to succeed in whatever career they pursue because the humanities trains students to embrace uncertainty.
But it’s an intellectual foundation that students like Keane and Fu said they only wish they could enjoy.
“Do I wish that I had the Yale experience of a liberal arts education? I can’t really say, it seems too surreal to imagine,” said Fu.