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An Unexpected Risk Factor

November-December 2007

One risk to continued strong endowment performance not addressed in Mohamed A. El-Erian’s annual letter was the uncertainty arising from unanticipated change in Harvard Management Company’s (HMC) leadership and perhaps in other senior investment personnel—many of them newly hired by him.

On September 11, the day after a Harvard Corporation meeting and two days before an HMC board meeting, the University announced that El-Erian would step down from his Harvard posts at year end to return to Pacific Investment Management Company (PIMCO), based in Newport Beach, California, where he had been managing director and senior portfolio manager. Upon his return to PIMCO, the pre-eminent fixed-income manager (with almost $700 billion in assets, nearly 20 times the size of the endowment, and a nearly 900-person staff in nine financial centers around the world), El-Erian will resume his managing directorship and assume the newly created posts of co-chief executive officer and co-chief investment officer. In these roles, PIMCO’s news release said, “he will help drive the firm’s future business strategy [and] extend the range of products and services….” He is the likely candidate to run the enterprise in the future.

Mohamed A. El-Erian

Photograph by Justin Ide / Harvard News Office

Mohamed A. El-Erian

In the official announcement, El-Erian said, “In returning to southern California to be closer to our family, I will miss my daily interactions with this special Harvard community—particularly my highly skilled and dedicated HMC colleagues, the remarkable leadership of the University and its schools, and the stimulating student body and faculty. I will leave behind close friends in an institution that, I am certain, will maintain and expand its tradition of excellence.” He declined to comment further.

University treasurer James F. Rothenberg, chair of HMC’s board of directors, saluted El-Erian for doing “an impressive job guiding and reorganizing Harvard Management Company,” and said, “[W]e will miss his leadership. In addition to achieving excellent investment returns, he has led ambitious efforts to rebuild HMC during his time as CEO, and those efforts will leave us with a strong organizational foundation going forward.” Rothenberg’s statement lauded not only “Mohamed’s skill but also…the talent and energy of his colleagues across HMC.” He did not respond to a request for further comment.

But Harvard Business School (HBS) dean Jay O. Light, an HMC board member, said he had expected El-Erian to stay in place for a long time.

As a professor, Light has researched and taught on investment management, and knows El-Erian from the 2005 search, as a colleague (El-Erian is a lecturer at HBS), and, he said, as a family friend. Light said that from his perspective—and, he believed, that of fellow board members—El-Erian’s decision was entirely a personal matter. Light said there were “no serious disagreements” about investment management, strategy, or tactics, and that the board was “very happy with Mohamed”—as measured by short-term performance and the longer-term strengthening of the HMC organization—and “would have preferred that he stay.” Light said family considerations were a “huge” factor in the decision: board members had been aware that El-Erian had had such concerns for an extended period. In that context, Light said, the PIMCO announcement was a surprise—but not that surprising, given that El-Erian had been considering a change apparently at least as long ago as May of this year.

Will HMC’s team of investment professionals—many recruited since El-Erian arrived (see “Money-Management Makeover,” November-December 2006, page 68)—remain in place? “We really have to make sure those people understand we value them and trust them,” Light said. HMC’s recent strong performance demonstrated what the staff was capable of—and no doubt increased their value to other institutions seeking talent. Moving expeditiously on the search for “another CEO whom they’ll also trust and respect” will obviously be critical. Rothenberg’s statement said a search would be “promptly launched.” Its duration is impossible to predict, but, Light said, “I’d love to get lucky.”

Light said El-Erian “really did do a good job of putting these platforms in place” for solid investment performance. In a perverse way, Light added, the better-than-expected results in the first full year of El-Erian’s leadership may have contributed to the timing of his decision to leave, “when he did a great job, and the world sees it, short term and long term.”