Can Timber Rebuild Harvard's Endowment?
Jane Mendillo boarded a turboprop plane in Brasília in April and flew deep into the Brazilian countryside. The flight took her over dirt roads running through endless hills and valleys and unimaginably beautiful wilderness. But Mendillo, head of Harvard University’s $32 billion endowment, wasn’t there to sightsee. She was visiting tree plantations and inspecting Harvard’s holdings. The pine and eucalyptus trees planted in neat rows that stretch for miles will be used to make charcoal, feed pulp mills and, Mendillo hopes, produce an increasing supply of saw logs for furniture and other consumer goods for a burgeoning Brazilian middle class.
Harvard’s endowment started buying U.S. forestland in 1997, when Mendillo—then a member of the investment team—recommended the purchases to her then-boss Jack Meyer. Now Mendillo, 54, is trying to remake the endowment after the world’s richest university suffered a $10 billion loss on its investments in 2009, a 27 percent drop that was the worst for any school. Amid the global credit crisis, Harvard was unable to unload assets and had to scramble to raise cash. The foundation is all that exists of a planned $1 billion science center begun in 2007 across the Charles River from the main campus in Cambridge, Mass.
Hired as chief executive officer of Harvard Management in July 2008, just as the endowment’s value peaked, Mendillo has sought to change the organization as well as the portfolio, reducing risk to guard against another market collapse. She started meeting weekly with Harvard President Drew Faust and worked to improve coordination between the financial arms of the university. She also hired a new risk officer to help prevent a replay of the cash squeeze. “She is an incredibly smart individual,” says Charles Ellis, founder of financial consultant Greenwich Associates, who served with Mendillo on the investment committee of Yale’s endowment fund, the world’s second largest, from 2002 to 2008. “She settled it all down and got things done. She deserves a lot of credit given what she inherited.”
Since she took over the endowment, Harvard’s holdings of forests, farms, and other natural resources in Brazil as well as in New Zealand and Romania have grown to about 10 percent of the portfolio—more than $3 billion. “What I want is properties that produce something that the world is going to want more of, and the increase in the supply is difficult,” Mendillo said in an interview earlier this year in the Federal Reserve Bank building in Boston, where Harvard Management has its offices. “Timberland is the perfect example.” It also is an area where she believes Harvard has an edge, she says: “A lot of other investors don’t have the expertise, don’t have the team to go out and look at individual timberland or other natural resources and decide what they think are the higher-potential or higher-risk situations.”
In addition to the size of the deals it does, Harvard stands out among universities because it’s one of the first to directly buy such properties outside of the U.S.—as opposed to investing in shares through other funds—and actively manage them, according to Jack Lutz, an economist at Forest Research Group, a consulting firm that specializes in timber investments. “Harvard goes into places no one else goes into,” he says. “They’re willing to accept more risk than most.”
The early and enthusiastic embrace of private equity and hedge funds turned Harvard into a top performer among endowments, with a 20-year return of 12.9 percent through 2011, despite the losses during the financial crisis. Over the past decade, Harvard’s natural resources investments have gained 13 percent a year on average, including 19 percent in 2011, according to its annual reports. In contrast, its investments in private equity managers such as Boston’s Bain Capital returned 7 percent in the past 10 years. Harvard will post results for its most recent fiscal year, which ended June 30, in coming weeks.
A mother of two, Mendillo graduated from Yale with a degree in English literature in 1980, and joined the university’s investment office. She got an MBA from Yale and went to Boston to work at Bain in 1984. She moved on to the Harvard endowment three years later as an insurance and steel industry analyst, then left in 2002 to run the endowment at Wellesley College, from which Harvard recruited her.
Her commitment to natural resources dates to 1997 when she recommended that Harvard buy timberland in Oregon, Washington, and then Pennsylvania. U.S. paper companies had been selling their forests for years as they sought to generate cash amid competition from overseas, finding buyers in pension funds and other institutions. While Harvard planned to keep the investments for 10 years, it sold them after fewer than seven because prices had risen so much—in part as a result of other universities’ buying.
The success galvanized Harvard Management, which added specialists such as Andy Wiltshire, a New Zealand native who worked in the forest service there and joined the endowment in 2001. Wiltshire, promoted to head of alternative assets including natural resources at Harvard in 2008, was the university’s highest-paid employee in 2010, earning $5.5 million. Mendillo received compensation of $3.52 million.
After its profitable U.S. investments, Harvard turned its attention overseas. In 2004, it outbid China International Trust & Investment, a Chinese finance and real estate company, for cutting rights to New Zealand’s Kaingaroa pine plantations. The next year, Harvard began buying forests in Romania. It owns almost all of a company that’s among the largest private holders of timberland there, with 86,500 acres valued at $100 million.
Not all members of the Harvard community endorse this approach. Students representing the coalition Responsible Investment at Harvard wrote a letter to the Harvard Crimson in December criticizing the school for making investment decisions “in a black box, removed from the input and examination of Harvard community members.” They also called for a more socially responsible investment fund and divestments from companies such as Alpha Natural Resources, a coal producer.
While Mendillo won’t discuss details of the university’s investments, she says they’re all done on a sustainable basis. “We have a very high conviction that if we create value in the portfolio by increasing the health of the forest, increasing the forest itself, allowing it to mature while we hold it, we’re going to be able to sell at a better price,” she says. “It’s economically and environmentally driven.”