Harvard Management Company Undertakes Sweeping Change
The new president of Harvard Management Company (HMC), N.P. Narvekar, who assumed responsibility for investing the endowment only last December 5, after overseeing Columbia University’s investment operations, today announced sweeping changes in the organization, intended to improve persistently lagging performance. The changes will have a dramatic effect on HMC personnel and investment operations, including:
- outsourcing the 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 HMC’s staff from 230 members by one-half, with the changes to be completed by the end of 2017; and
- appointing several new senior investment personnel, including several of Narvekar’s former associates from Columbia's high-performing investment operation.
Downsizing Hybrid Management
According to the letter Narvekar distributed to the community,
HMC has created significant value for Harvard University over the past four decades, but we now face 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.
Of internal management, he said, “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. As a result of these dynamics, 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 the investing activities of these portfolios. Therefore, we have made some important but very difficult decisions.”
Those decisions include:
- outsourcing the remaining “internally managed hedge fund teams” by the end of fiscal year 2017 (June 30);
- spinning off the team that has managed HMC’s direct real-estate investments (which have performed very well since 2010), by the end of the calendar year; and
- “at this time” retaining the timber and agriculture (natural resources) portfolio, where returns have lagged of late.
In the aggregate, those changes result in the reduction in HMC’s employment.
From Asset “Silos” to “Generalist” Management
Turning to investment management per se, Narvekar said a “second organizational change is ultimately far more profound” for bringing about improved investment returns after a sustained period of significant underperformance. That represents a shift from focusing on individual asset classes (HMC’s traditional “policy portfolio” of asset allocations, and the new model introduced by Narvekar’s precedessor, Stephen Blyth, in 2015) toward a more general approach.
Narvekar characterized the former “silo” approach as conferring the benefits of specialization, but suffering from “unintended consequences,” such as gaps in coverage and unnecessary duplication, plus “an overemphasis on individual asset class benchmarks that I believe does not lead to the best investment thinking for a major endowment.”
In the new system,
[A]ll members of the investment team 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. Aspects of the generalist model are used to varying degrees by a number of leading endowments. HMC will create a version of the generalist model that best serves Harvard University.
Compensation will be adjusted to “fully [align] the generalist investment team with the performance of the overall endowment,” rather than paying investment professionals for their performance relative to benchmarks for each separate asset class. This change will be effective for fiscal 2018, beginning this summer.
A Five-Year Plan
This is a major series of changes, as Narvekar reported:
The HMC Board of Directors and I agree that transforming HMC’s organization and portfolio is a five-year process. In retrospect, my 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 subsequent to that period. 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 before we have completed our multi-year transformation. When complete, the organization and portfolio will be better aligned to maximize future risk-adjusted returns at the appropriate risk appetite for Harvard.
He also stressed that the portfolio would be constructed for Harvard’s unique needs and risk profile, and therefore would not necessarily look like, or perform like, those of other universities with large endowments. Mindful of experience a decade ago, he noted, “Coming into 2007/2008 there was an arms race among the endowments to take on more and more risk, and many endowments, including Harvard, paid a severe price,” losing $11 billion in value. (Columbia’s endowment did not suffer nearly so much during the financial crisis.)
To help implement the changes he is putting in place, Narvekar also announced a series of senior appointments (read the announcement here):
- Rick Slocum, chief investment officer (in March); most recently, chief investment officer of The Johnson Company, a single-family office based in New York, and previously, responsible for private-equity and portfolio-management functions at Robert Wood Johnson Foundation.
- Vir Dholabhai, a managing director of the investment team, effective January 30; previously, senior risk manager for a major Dutch pension-services provider, and nine years of experience at Columbia Investment Management Company (CIMC), where he oversaw the investment process, portfolio analytics, and portfolio risk allocation.
- Adam Goldstein, a managing director of the investment team, effective February 6; previously, a managing director of investments at CIMC for eight years, where he was responsible for sourcing and underwriting new investment opportunities, monitoring the existing portfolio, and building standardized analytical tools used in evaluation of investments across the portfolio.
- Charlie Saravia, a managing director of the investment team, effective January 30; previously, co-manager of a fundamental research team for family offices in Latin America, and nine years of experience at CIMC, where he sourced, evaluated, and managed investments across asset classes and regions.