Harvard Endowment Revamps Investment Approach

Disappointed with investment returns that have lagged well behind other universities in 2017, Harvard University is overhauling the investment management structure of its $37.1 billion endowment.

“The endowment’s returns are a symptom of deep structural problems at HMC and the resultant significant issues in the portfolio,” said Harvard Management Company (HMC) CEO Narv Narvekar in the university’s 2017 financial report. “The problems highlight the critical impact of culture, structure, and incentives in an investment organization.”

Narvekar said that, as of June 30, HMC has largely exited internal management of public markets assets, attributing the move to “practical considerations” rather than “any specific dogma.” He said that while internal management tends to mean lower fees and expenses, “today’s market landscape makes it ever more difficult to attract and retain top portfolio managers.”

Although HMC’s natural resources portfolio will continue to be managed internally, Narvekar said the platform would take multiple years to reposition.

“We are in active dialogue with our largely new and accomplished natural resources team to determine the best path forward with regards to the existing assets,” he said, “and to develop a strategic longer-term plan for the overall natural resources portfolio.”

Additionally, the HMC Board of Directors took some markdowns on value in fiscal year 2017, which Narvekar said meaningfully impacted their results. He also pointed out “markdowns do not imply sales.”

The markdowns reduced the value of HMC’s natural resources holdings by more than $1 billion to $2.87 billion, from $3.95 billion a year ago. Meanwhile, the portfolio’s domestic fixed-income holdings plunged to $1.59 billion from just over $12 billion in 2016.

Narvekar also said that HMC is moving to a generalist model from a so-called “silo” approach, under which HMC’s investment professionals have historically focused their work within specific asset classes. He said this approach overemphasized individual asset class benchmarks, and created unintended consequences, such as gaps in the portfolio, and unnecessary duplication.

“Overall, I believe the silo approach did not lead to the best investment thinking for a major endowment,” he wrote. “We have now moved our approach towards a generalist investment model in which all members of the investment team take ownership of the entire portfolio.”

He added that the investment team will have a singular focus: the performance of the overall endowment. “We will engage in focused debate and discussion about investment opportunities, both within asset classes and across the investment universe.”

As of June 30, HMC has made the following moves:

• The relative value platform has shut down.  It is expected that two of the teams will continue to be external partners.

• The internally managed equity platform has shut down.

• The credit platform has been repositioned and is currently executing its strategy internally. However, this team is expected to depart HMC and possibly continue work as an external manager.

• The real estate platform responsible for direct investments is also expected to spin off.

•  The size of the support organization has been reduced.