Commentary: Leaving Harvard Greener
Jack R. Meyer, the investing superstar who heads the in-house firm that manages Harvard University's massive endowment, is stepping down after a phenomenal run -- and his critics are rejoicing. Meyer announced on Jan. 11 that he plans to leave this summer to launch his own firm. Despite his strong performance, Meyer's departure is being hailed by those who complain that Harvard has grossly overpaid both Meyer and his investment team. In fiscal 2004 alone, Meyer and his top five managers were paid $78.4 million.
No doubt, that's a lot of dough. But the critics have got it wrong: Harvard was lucky to have Meyer. When he arrived in 1990, the university had a $4.7 billion endowment. Now, it stands at $22.6 billion. Over the past decade, Harvard Management Co. has achieved an annual return of 15.9% -- more than 50% higher than the returns posted by the median large institutional fund. Meyer and his team did even better in the bond market over the past five years, posting returns more than twice the industry average. Such outperformance has generated an extra $12.2 billion for Harvard over the last decade alone -- an amount nearly equal to the entire endowment of Yale, the nation's second-wealthiest university.
Those investment returns have helped transform Harvard, enabling President Larry Summers to embark on an extraordinarily ambitious agenda. Consider the critical issue of financial aid. Just 3% of students at the nation's top 146 colleges come from families in the bottom socioeconomic quartile. "For the first time probably in the history of our country, the gap in life prospects between the children of the fortunate and the children of the less fortunate is rising," Summers warned in a recent interview with BusinessWeek.
Yet thanks to Meyer's success, Summers was able to announce in 2003 that any student with a family income of less than $40,000 could attend Harvard "with no parental contribution at all." Harvard has also been boosting its financial aid budget at a double-digit clip, and the endowment now covers 72% of undergraduate financial aid. In contrast, the University of Chicago's endowment covers only about a quarter of that institution's financial aid budget. And Chicago is one of the nation's 15 richest universities.
Meyer's investment windfall has also allowed Harvard to beef up its educational resources. Money has gone into hiring more professors and expanding Harvard's role in the sciences, including plans for a new engineering school. And Summers has begun a massive expansion that he predicts will reshape Harvard "for the next century or two." But without Meyer, financing such lofty ambitions will be tougher.
Harvard Management is now at a crossroads. The university could mollify critics by hiring outside managers to invest most of its assets, as most universities do. In fact, many of Meyer's well-paid stars have already left, taking the management of some of Harvard's money with them. But Meyer warns that if Harvard chooses this route, "our fees will go up and our returns will go down." Indeed, last fall Summers estimated that if he turned over all the assets to outsiders, "we'd be spending $50 to $100 million a year more getting our endowment managed."
Sure, Meyer's pay is outrageous in academia, where even top professors often make less than $150,000. But if anything, Meyer and his colleagues have been underpaid by Wall Street standards -- which is one reason so many have fled. That's proof positive that Meyer has been a real bargain for Harvard.
By William C. Symonds