Harvard Loses an Investing Star
By William Symonds
How do you replace Babe Ruth? That's the dilemma facing Harvard University, following the Jan. 11 announcement that Jack R. Meyer, the legendary CEO of the in-house firm that manages Harvard's endowment, will be stepping down this summer.
Since he took over Harvard Management Co. in 1990, Meyer has compiled a stunning track record that has enabled Harvard to bolster its position as by far the world's wealthiest univeristy. When Meyer arrived, Harvard's endowment was just $4.7 billion. Today, it has ballooned to $22.6 billion (see BW, 12/27/04, "How to Invest Like Harvard").
Some of that growth is due to Harvard's fund-raising prowess. But over the past decade alone, Meyer's ability to outperform the typical large institutional fund has generated an extra $12.2 billion for Harvard's coffers -- or nearly as much as the endowment of Yale, the nation's second-wealthiest university.
Meyer's departure was something of a surprise. Just last month, in a wide-ranging interview with BusinessWeek in his spacious office overlooking Boston Harbor, Meyer said, "This is the best job in the investment business. There's no other job where you can try to aggressively add value across all the asset classes," adding: "It's enormous fun."
So why is Meyer suddenly bolting this great job for the unknown rewards of launching his own private investment firm? Meyer says after 15 years, "It's time for me to start a new chapter." He readily admits that he has also grown awfully tired of the annual debate over how much he and his top managers are paid for generating so much wealth for Harvard. In fiscal 2004 (ending last June 30), when Harvard Management earned 21.1%, Meyer and his five top managers were paid $78.4 million -- far beyond what anyone earns in Harvard Yard, or anywhere else in American academia.
Meyer makes the case that his people are hardly overpaid by the standards of Wall Street -- the relevant benchmark for investment managers. But after all the controversy, "I wouldn't mind dropping out of the spotlight a little bit," he confesses.
Meyer wasn't brilliant just on the upside. Apart from devising an aggressive, highly diversified strategy to not just maximize returns, he also sharply reduced the risk of sizable losses. His "model portfolio" called for sinking just 26% of Harvard's money into conventional U.S. equities and domestic bonds. All the rest was scattered much further afield, from real estate to foreign equities to massive holdings of timber, including a $600 million forest in New Zealand.
Thanks to this diversification, Harvard was barely buffeted during the savage bear market of 2001-02, when Nasdaq lost more than 80% of its value. In contrast, Harvard Management was down a mere 2.7% in 2001 and just 0.5% in 2002.
IN THE LINE OF FIRE.
In departing, he's also taking four of his top managers with him -- most notably David Mittelman and Maurice Samuels. "These two gentlemen are the best fixed-income managers in the world," Meyer boasts. Over the last five years, Mittelman has helped Harvard earn an annualized 17.8% return on domestic bonds, over twice the 7.6% industry benchmark.
Samuels has helped Harvard achieve a 23.2% return on foreign bonds, more than triple the 6.7% benchmark. Their ability to beat the market is a key reason why Harvard earned a a total annualized return of 15.9% over the past decade, vs. just 10.1% for the average large institutional fund.
Because Meyer paid his managers for performance, Mittelman and Samuels were squarely in the line of fire from Harvard's critics, since each was paid about $25 million last year. Meyer argues those big paychecks were richly deserved. "Our compensation system is superior to any I've seen," he contends. "We don't pay for benchmark performance. If you simply match the benchmark, you get no bonus. And every time you earn a positive incentive, we withhold a substantial portion, and it stays in the bank and is subject to clawback if you underperform in the future."
Harvard has formed a blue-chip committee to find a successor to Meyer. Led by Harvard Treasurer James Rothenberg, it will include two former U.S. Treasury Secretaries: Robert Rubin, now vice-chairman of Citigroup (C ), and Harvard President Larry Summers. "We'll cast the net pretty broadly, looking both inside and outside -- and even overseas if we need to in order to find the best available talent," says Rothenberg.
But in the end, Harvard may well conclude that it's impossible to recreate the house that Jack built. In recent years, several of Meyer's most successful managers have already left Harvard to go out on their own. As they did, Meyer often gave them some of Harvard's money to manage. As a result, the amount of Harvard's wealth that was managed in-house fell from 85% seven years ago to about 55% now.
In the end, Harvard may well decide that its best bet is to stick with one of the nation's most respected investment teams and simply ask Meyer's new firm to manage a good chunk of the university's money. Rothenberg says while no decisions have been made, "it's conceivable that Jack might get some."
"A GOOD DEAL."
In that case, Harvard would increasingly resemble most other wealthy universities, who hire outsiders to manage all or most of their money. Still, Rothenberg has no intention of dismantling Harvard Management, and it will no doubt continue to manage some holdings, such as its massive timber assets.
Meyer neatly framed the issue that's now before Harvard in his interview with BusinessWeek just before the holidays. "I'm very confident that [Harvard Management] has been a good deal for Harvard. If Harvard had achieved the same results as we have using external managers, it would have cost more than twice what it actually cost us," he said. "The thing I'm not confident about is whether you can maintain world-class portfolio managers in an academic setting. It's increasingly difficult to do with all the focus on compensation."
That's the dilemma that Summers and Rubin, along with other members of the committee, will now have to resolve.
Symonds is BusinessWeek's Boston bureau chief