Harvard Money Managers Exit After Years of Subpar Returns
After years of subpar results at Harvard Management Co., three high-level managers have exited the $32.7 billion endowment and the university is searching for new leadership.
Apoorva K. Koticha, 48, among the highest-paid traders at Harvard Management in 2011, has left, according to two people familiar with the matter. News of his departure comes a week after Jane Mendillo, chief executive officer of the university’s investment company since July 2008, said she will resign at the end of the year. Mark McKenna, 43, a money manager at the endowment, moved to BlackRock Inc. (BLK) this month to start an event-driven hedge fund. Since April 2013, Harvard Management has also parted ways with two heads of its private-equity unit.
“When the team posts mediocre records too many years in a row, the coach goes,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “And, not far behind her, the assistant coaches.”
Mendillo, 55, has promoted from within to build her top management, elevating Stephen Blyth and Andrew Wiltshire as co-heads of investing. The endowment is considering internal candidates as well as outside executives to fill the CEO role, said James F. Rothenberg, chairman of Harvard Management’s board. As the fund embarks on the search, its challenge will be to attract talent to restore its reputation as a leading endowment manager.
The board will serve as the search committee for a new CEO, Rothenberg said. Directors aren’t seeking to change Harvard’s approach to investing, which combines using staff for internal trading and farming out money to external managers. The endowment employs about 200 people.
“We like the model we have,” Rothenberg, who is also a member of Harvard Corp., the university’s board of trustees, said in an interview yesterday.
Harvard University, which helped redefine how college endowments manage money through the use of non-traditional asset classes, has lagged behind the rest of the Ivy League since the credit crisis as private equity, real estate and emerging markets faltered. Boston-based Harvard Management oversees the Cambridge, Massachusetts, school’s endowment, which is the world’s largest.
Harvard’s endowment posted annual average gains of 1.7 percent in the five years ended June 30, 2013, according to data compiled by Charles Skorina & Co. That compares with annual returns of 6.8 percent at Columbia University, 5.4 percent at University of Pennsylvania and 3.3 percent at Yale University.
The endowment’s performance may reflect both prudence at Harvard after it almost ran out of cash in 2008 and Mendillo’s management style. Mendillo, who took over as head of the fund a few months before the September 2008 collapse of Lehman Brothers Holdings Inc. triggered a worldwide financial crisis, helped Harvard’s endowment recover after the worst recession since World War II.
Harvard suffered severe financial losses, including a 27 percent investment decline in the year ended June 30, 2009, and a cash crisis brought on by its exposure to financial derivatives. Like the rest of the university, the endowment was forced to cut costs and staff. Harvard’s endowment is still seeking to recoup losses after the fund peaked at $36.9 billion in 2008. At the time, Mendillo said she would need at least five years to fix the portfolio, which included unwinding stakes in illiquid securities.
Mendillo, who said last week she is resigning at year’s end for personal reasons, shouldn’t be judged for the endowment’s performance in 2009, Glenn Hutchins, a member of the management company’s board, said in a telephone interview. He said her departure isn’t connected to performance and that the endowment is beating internal benchmarks, generating an additional $1.5 billion in return as she increased internal trading and cleaned up and repositioned a portfolio of outside managers.
“One of the things I think Jane has done very well is to build a terrific management structure with really good people,” said Hutchins, co-founder of Silver Lake Management LLC, a private-equity firm based in Menlo Park, California. “You don’t have a feeling that we’re vulnerable in any way.”
In the announcement of Mendillo’s departure, Harvard Management estimated long-term gains through her last fiscal year at the helm, suggesting that performance may be improving. The endowment will have an average annual return of 11 percent to 12 percent for the five years ending this month. According to calculations by Charles Skorina & Co., that indicates that for the current year, the endowment will report a return in the 13 percent to 18 percent range.
Harvard hasn’t said whether it is replacing McKenna, who joined the endowment in 2009 to manage the event-driven strategy, or Koticha, a managing director in international fixed income who collected almost $3.1 million in 2011, according to regulatory filings. Koticha’s name wasn’t present in the list of best-compensated money managers at Harvard Management in 2012, the most recent calendar year for which the fund has disclosed pay.
Harvard Management’s private-equity division experienced turmoil in 2013 as Peter Dolan, the unit’s director, left after almost 20 years only to have his replacement, Lane MacDonald, depart in less than three months. The university hired Richard Hall to fill the position this year.
Blyth, 46, joined the company in 2006 from Deutsche Bank AG and oversees public markets including much of the internal trading. Wiltshire, 57, is in charge of alternative assets such as private equity, real estate and natural resources. He was hired in 2001 and made $7.9 million in 2012, the top earner at Harvard Management.
An industry veteran who began her career at Yale, Mendillo sold stakes in private-equity funds and sought more direct control over investments and trading. She joined Harvard in 1987, rising up the ranks under CEO Jack Meyer, before leaving to manage Wellesley College’s money in 2002. She returned in 2008, succeeding Mohamed El-Erian, who had been hired to replace Meyer.
A sore spot in Harvard Management’s portfolio has been private equity, which accounted for about 16 percent of assets in 2013, up from about 11 percent in fiscal 2008. The endowment’s trailing 10-year annualized private-equity returns have worsened relative to benchmarks during that period, trailing its benchmark by almost 3 percentage points as of June 30, 2013. That compares with an outperformance of almost 17 percentage points for the portfolio’s 10-year returns as of 2008.
“I would characterize our private equity performance this year as fair,” Mendillo wrote in her 2013 annual letter. “While this asset class still presents unique opportunities for attractive returns, it has gotten much more crowded and there is less of an illiquidity premium. As a result, we are actively focused on honing our private equity strategy.”
Yale, the world’s second-wealthiest school with a $20.8 billion endowment, last year reduced what it expects to invest in private equity to 31 percent of the portfolio from 35 percent while defending the model that emphasizes alternative assets.
Mendillo stuck to her drive into emerging markets even as growth faltered. During her tenure, investments in emerging markets failed to beat benchmarks every year except 2009, when they outperformed by 370 basis points, according to Harvard Magazine. A basis point equals a hundredth of a percentage point.
Harvard Management allocates 11 percent of its portfolio to emerging markets, higher than peers such as Yale. In 2012, when emerging-markets investments tumbled 17.4 percent, Mendillo wrote in the annual report that “emerging-markets investments are poised to benefit from the phenomenal rate of change in local, regional and global businesses worldwide and will be one of the key drivers of our portfolio’s future performance.”
Mendillo sought to make Harvard’s expertise in international markets a competitive advantage, touting direct investments in natural resources such as timberland in Brazil. Yet there were stumbles as seen earlier this year when the university said it would sell forest land in Romania amid a bribery scandal involving an agent it used.
Harvard, even with potential successors groomed by Mendillo, may look outside for a fresh perspective, said Charles Skorina, whose executive search firm specializes in university CIOs. He said proteges of Yale’s David Swensen who’ve gone on to run other university endowments would make good candidates, including Seth Alexander at the Massachusetts Institute of Technology.
“I would be surprised if they hire from the inside because the performance has been poor,” said Skorina, who’s based in San Francisco.