Harvard's top investor heading back to PIMCO

Surprising news out of Harvard University today that Mohamed El-Erian will step down as head of the school’s $35 billion endowment investment company. El-Erian is going back to Bill Gross land as co-CEO of bond giant PIMCO on the west coast. It would be very hard to believe that Harvard pushed El-Erian out (barring some kind of undisclosed monkey business). Prior investing boss Jack Meyer walked out the door in 2005 taking some of the most talented managers with him to his new hedge fund. El-Erian was left with the difficult task of farming out Harvard’s money to outside managers while recruiting new in-house talent as well. The endowment’s return for the year ended June 30 was nothing that should have gotten the top man in trouble, either. Assets gained 23%, the best performance in 7 years and far better than the average university endowment.

And there’s no way El-Erian could be blamed for the school’s multi-hundred million dollar loss when local hedge fund Sowood Capital blew up. It was Meyer’s decision to put so much money there when the hedge fund’s managers left Harvard to go out on their own in 2004.

I guess it could have been the cold weather and prospect of a snowy winter here in Massachusetts. I have no inside knowledge but I’d bet the real cause was PIMCO’s desperate need to right it’s own ship. Performance at Bill Gross’s massive PIMCO Total Return Fund (Symbol: PTTAX) has been mediocre or worse since El-Erian left. And having read some of the profiles since he left, it was starting to sound like Gross was feeling the stress a bit too much. A story in the Wall Street Journal last August, reported that Gross had walked out for an unplanned vacation. In a profile done three or four years ago at Bloomberg, written before El-Erian left, it was clear that Gross relied heavily on his colleague, who was sometimes able to quell Gross’s rapid-fire reactions to current events. Maybe they made him an offer he couldn’t refuse, one with a dollar sign and a lot of zeroes attached?

Another possibility? El-Erian was hired during the term of since-deposed Harvard President Larry Summers. The endowment’s top manager are annually raked over the coals by members of the Harvard community for their seemingly huge pay packages (large in the university context, miniature in the investing world). Summers stood up for the high pay and El-Erian had said he wasn’t planning to change the compensation scheme. Maybe that all changed under Summers’ replacement, Drew Gilpin Faust. Without the money to keep the top talent, running the endowment would become a much more difficult task.