Harvard’s $36bn endowment to hire external managers

Harvard is laying off half the 230 staff who work on its $36bn endowment and hiring external asset managers instead, in an attempt to reverse a decade of underperformance relative to other Ivy League schools.

Narv Narvekar, who was poached from Columbia University last year to become chief executive of the endowment’s management company, Harvard Management (HMC), said the university was not able to attract the talent or come up with the investing ideas to justify an in-house team of hedge fund-style managers.

 

“In the past, HMC’s unique approach of investing in internally-managed portfolios generated superior returns,” Mr Narvekar wrote in a university memo.

 

“In recent years, however, the tremendous flow of capital to external managers has created a great deal of competition for both talent and ideas, therefore making it more difficult to attract and retain the necessary investment expertise while also remaining sufficiently nimble to exploit rapidly changing opportunities.”

 

Mr Narvekar’s memo also warned that the current financial year, which ends in June, will be another year of “challenged” performance.

Harvard’s investments lost 2 per cent in the year ended June 2016, the worst result of all the Ivy League schools, bar Cornell. Over the past 10 years, it has averaged annual returns of 5.7 per cent, lagging behind even a traditional 60/40 stock and bond portfolio that would have returned 6.9 per cent.

Since the Harvard endowment was reshaped under the leadership of Jack Meyer, chief executive from 1990 to 2005, it has run much more of its money internally than other universities, trading stocks and bonds in ways similar to a hedge fund.

Mr Narvekar’s reforms “blow away the cobwebs of past glory”, said Charles Skorina, a headhunter for the investment management industry. “HMC under Jack Meyer was effectively a multi-strategy hedge fund in the glory days of hedge funds, but hedge fund managers are no longer the masters of the universe.”

The reliance on in-house managers was controversial with university staff, students and alumni even before performance began to crumble a decade ago, and HMC faced persistent complaints about the high pay packages of its staff.

Mr Narvekar is HMC’s fourth chief executive in 12 years. His predecessor, Stephen Blyth, ran the endowment for only 18 months and several of the Wall Street traders who he hired exited after poor results last year.

The endowment’s real estate team is being spun out as an independent management company and will continue to run the property portfolio under the shake-up announced on Wednesday. A natural resources portfolio, focused on timber and agriculture, will continue to be managed internally “at this time”, Mr Narvekar said.

HMC also said that it had hired a new chief investment officer — Rick Slocum from the Johnson Company, a New York family office — and three more managing directors with expertise working with external managers.

The staff who remain will be charged with thinking across asset classes, and their pay will also be revamped so that compensation is more closely based on the performance of the whole portfolio rather than particular asset classes.

”Major change is never easy and will require an extended period of time to bear fruit,” Mr Narvekar wrote. “While I believe HMC’s investment performance will be challenged in fiscal year 2017, by the end of the calendar year the organisation will look and act very differently than it does today.”

 

 

by: Stephen Foley in New York

Source: ft.com