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John Harvard's Journal

Endowment Overhaul

March-April 2017

Beginning his eighth week as president and CEO of Harvard Management Company (HMC), N.V. Narvekar on January 25 announced sweeping changes in how the University’s $35.7-billion endowment will be invested. Change was expected. HMC’s average annualized rate of return on investments during the past 10 years has been 5.7 percent: significantly below both its targeted return of about 8 percent and the results recorded by peer institutions including MIT, Princeton, and Yale—all with investment processes that differ from Harvard’s and that earned returns above 8 percent in that period. Because distributions from the endowment account for more than one-third of Harvard’s operating revenues, persistent weak performance puts academic aims at risk across the University. Perhaps accordingly, Narvekar, who arrived after a successful tenure at Columbia’s investment operation (8.1 percent annual rate of return during the past 10 years), moved swiftly to effect major changes, including:

  • outsourcing management of several classes of assets—in effect, shifting away from HMC’s traditional “hybrid” model of investing, with a significant portion of the assets managed internally by HMC staff members;
  • reducing the 230-member staff by half, with the changes to be completed by the end of 2017; and
  • appointing new senior investment professionals, including three former associates from his Columbia team.

N.P. Narvekar
Photograph courtesy of Harvard University

In a letter describing the changes, Narvekar noted that after past strengths, HMC now faces “challenges to our continued success. The investment landscape has evolved significantly, requiring us to adapt two aspects of HMC’s organizational and investment models in order to maximize performance over the long term. The first is the hybrid model of investing, which utilizes a mix of internal and external investment teams, and the second is a ‘silo’ approach to asset management that focuses team members as specialists in specific asset classes or strategies.”

On internal management, he wrote, “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. As a result…active hedge fund-like investments managed internally at HMC now comprise a very small percentage of the overall endowment. We can no longer justify the organizational complexity and resources” necessary to support them. Those internally managed funds will be outsourced by June, and the team that manages HMC’s direct real-estate investments (performing strongly since inception in 2010) will be spun off as a separate organization by year-end. The timber and agriculture portfolio, where returns have lagged, will be retained “at this time.” Severance costs will be reported as HMC expenses (reducing investment returns when incurred).

Turning to portfolio management per se, Narvekar said a “second organizational change is ultimately far more profound” for improving investment returns. Rather than focusing on individual asset classes (HMC’s traditional “policy portfolio” of allocations among stocks, bonds, private equity, real estate, and so on, and the modified model introduced by Narvekar’s predecessor, Stephen Blyth, in 2015), HMC will now adopt a “generalist” process and style. In place of “an overemphasis on individual asset class benchmarks,” the goal is for “all members of the investment team [to] take ownership of the entire portfolio. The team will have a singular focus: the performance of the overall endowment. HMC’s existing investment professionals focused on externally managed funds will form the core of this generalist team. Importantly, the generalist model will be supported by a partnership culture in which the collective team engages in focused debates about investment opportunities both within asset classes and across the investment universe.” That approach, he noted, is used “to varying degrees by a number of leading endowments,” and he seeks to adapt that process to Harvard’s requirements. Compensation will shift from individual portfolio managers’ performance relative to benchmarks for asset classes, toward the performance of the endowment overall; that change takes place this summer.

Getting the desired results will take time: existing investments, many illiquid, must be redeployed; new people and processes will have to arrive and take effect. Narvekar counseled patience, writing that he and HMC’s board “agree that transforming HMC’s organization and portfolio is a five-year process.…[M]y experience at Columbia’s endowment proved that it did indeed require about five years to position both the organization and portfolio in order to deliver strong risk-adjusted returns…. While I believe HMC’s investment performance will be challenged in fiscal year 2017, by the end of the calendar year the organization will look and act very differently than it does today. It is also likely that our organization will experience more changes….When complete, the organization and portfolio will be better aligned to maximize future risk-adjusted returns at the appropriate risk appetite for Harvard.”

Beginning immediately, effecting those hoped-for improvements will involve new senior leaders: Rick Slocum, HMC’s first chief investment officer; and a trio of senior portfolio, analytical, risk, and research personnel from Columbia: Vir Dholabhai, Adam Goldstein, and Charlie Saravia, all appointed managing directors of HMC’s investment team. Read a complete report at harvardmag.com/hmc-overhaul-17.

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