Finance

Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

It’s becoming an annual tradition. Harvard is coping with another disappointing year for its $37.1 billion endowment.

In a recent letter to the Harvard community, the newly installed chief executive officer of the Harvard Management Company, Nirmal P. Narvekar, reported that the endowment returned 8.1 percent for the fiscal year ended June 2017. He called the performance “disappointing and not where it needs to be.”

Behind Again
Harvard lags other endowments that have reported results for 2017
Source: Bloomberg

It’s a refreshingly candid assessment. The endowment lagged a traditional 60/40 portfolio of U.S. stocks and bonds by 2.2 percentage points last year, including dividends. And while many college endowments have not yet reported their 2017 results, early indications are that Harvard fell behind many of its peers. MIT’s endowment, for example, returned 14.3 percent last year, and Dartmouth’s returned 14.6 percent.

Musical Chairs
The lack of stability at Harvard's endowment over the last decade has been costly
Sources: Bloomberg, author's calculations

The previous fiscal year was a letdown, too. The endowment declined 2 percent in 2016. The Harvard Crimson called the endowment’s performance “unacceptable.” It turned out Harvard was already plenty concerned. Weeks later, Bloomberg News reported that Harvard had commissioned McKinsey & Co. in 2014 to diagnose what ails the endowment.

It didn’t use to be this way. During Jack Meyer’s 15-year tenure as CEO of Harvard Management, the endowment was the envy of colleges and universities. Meyer racked up a return of 15 percent annually from 1991 to 2005. The endowment ballooned to $22.6 billion from $4.7 billion.

Golden Years
Jack Meyer grew the Harvard endowment by $18 billion during his tenure as chief executive
Sources: Harvard, Bloomberg, author's calculations
Note: Indexed to 100.

But many in the Harvard community balked at the millions of dollars that Harvard paid Meyer and his team. When Meyer resigned in 2005, he acknowledged that his decision was based in part on public scrutiny of his compensation.  

Little did Harvard know the turmoil that awaited. The endowment burned through four CEOs over the next decade. The disruption has been costly. The endowment trails a 60/40 portfolio by 3 percentage points annually over the last three years and by 2 percentage points annually over five and 10 years. It also trails all but a small handful of peers over the last 10 years.  

It doesn’t take fancy consultants to spot the problem. Harvard abandoned one of the stalwart adages in finance: Pick an investment philosophy and stick to it. With its revolving door of chief executives, the endowment has been anything but stable.

Narvekar knows the value of a steady hand. He credits stability as a factor in his success at Columbia, where he was CEO of the endowment from 2002 until he joined Harvard last year. Most of his team worked together at Columbia for more than a decade, with excellent results. Its endowment returned 8.1 percent annually over 10 years through 2016, matching the performance of Yale’s revered endowment during that period and besting Harvard by 2.4 percentage points annually.

Now the question is whether Harvard can allow Narvekar and his team to do their job. It won’t be easy. As Narvekar warns, “It will take a number of years to reposition HMC in order to perform up to our expectations from that point forward.” In other words, Harvard may have to tolerate disappointing returns for several more years while Narvekar molds the endowment to his vision.

Harvard must also finally accept that managing the world’s biggest academic endowment will never be cheap. Even if the endowment were invested in low-cost index funds, it would still cost Harvard tens of millions of dollars a year.

Of course, Narvekar has a far more complex mandate than buying index funds, which is likely to be more expensive. The Harvard Crimson recognized two years ago that while the compensation of the endowment’s managers “is high in absolute terms, relative to the immense potential of the endowment and the world of finance, it is far from exorbitant.”

The Harvard endowment is lucky to have a talented and forthright chief executive like Narvekar at the helm. Now the Harvard community must do its part: Keep calm and get out of the way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nir Kaissar in New York at nkaissar1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net