After years of disappointing investment returns and four CEO changes in the space of roughly a decade, Harvard Management Corp. (HMC) dropped a bombshell Wednesday, saying it was getting out of the business of managing its own endowment.
For years, Harvard—once a top performer among universities, but in recent years an also-ran—pursued a “hybrid” approach, employing multiple teams of in-house investment managers as well many outside managers. Now, virtually the entire $36 billion endowment, the largest university endowment in America, will be managed by outsiders.
The changes were announced by N.P. Narvekar, HMC’s recently installed CEO. In the short run, it’s expected that half of HMC’s 230-person staff will lose their jobs. In the long run, Harvard’s move could provoke a fresh round of soul searching in the increasingly challenged field of endowment investing.
Narvekar, who previously racked up superior returns at Columbia University, is a devotee of the “endowment model” pioneered by David Swensen of Yale. Over 30 years, Swensen has racked up a phenomenal record. Not surprisingly, colleges and universities have rushed to imitate Swensen.
The problem, as detailed by Coins2Day in a recent feature, is a familiar one in investment annals: widespread adoption has bred a return to the mean. Swensen’s secret sauce consisted of diversifying into asset classes that were relatively uncommon and in which Yale, in particular, enjoyed unique advantages. Back in the 1980s, few endowments were involved in private equity, for example, so practitioners enjoyed a scarcity value. And thanks to Yale’s network of alumni and faculty connections, it could access the best PE firms, the best venture capital, and so forth.
In recent decades, endowments and other institutions have piled into PE, hedge funds, and the like. Results at elite institutions continue to outperform, but by a considerably smaller margin than before. Non-elite schools that adopted the Swensen approach had to shoulder an added burden: the average school, by definition, will merely own the average hedge fund, the average PE firm, etc.
And the numbers show it. The average university endowment has had a poorer record—over one year, three years, five years, and 10 years—than the average public pension fund, according to the Wilshire Trust Universe Comparison Service. And through the decade ended in 2015, (the last year for which such results are available) colleges also trailed a passive stock and bond index.
Swensen has argued that the average small investor would be better off in indexes. The same may be true for the average university. The burden is on Narvekar to show that Harvard can do better.
At very least, schools would do well to heed Narvekar’s admission, in a letter announcing the changes, that Harvard felt the need to reduce its organizational “complexity.” In their quest to become the next Swensen, endowment chiefs have overseen the growth of dizzyingly complex portfolios often run by scores of different managers. At the same time, fearful of losing their jobs, endowment chiefs have become bafflingly short-term sensitive. Swensen’s greatest insight was that endowments have the luxury of being able to invest for the long-term. Schools would do well to work with fewer managers and hold fewer securities—and to stick with what they own.
