Yale’s Chief Investor Says HMC Overpays

Yale Chief Investment Officer David Swensen, whose fund has outperformed Harvard’s over the past two decades, said in a speech last month that Harvard overpays its endowment managers—providing ammunition for alumni who have assailed the University’s salary structure.

“I have long said that the structure of Harvard Management is inherently unstable,” Swensen said during a question-and-answer session after he spoke to the National Association of College and University Business Officers’ Endowment Management Forum in New York on Jan. 27, according to Institutional Investor magazine. “You can’t pay managers astronomical amounts of money because it tears at the fabric of [the university],” he said, according to the magazine.

Swensen, who reportedly earned $1.15 million in 2004, has steered the Yale endowment to a 16.1 percent annual return over the last 20 years, beating Harvard’s 14.9 percent.

Both universities have earned impressive endowment returns despite their different structures. Yale relies on external management of its endowment, while Harvard has a balance of in-house and external management.

But the departure of several top managers from Harvard Management Company (HMC) over the past year has raised new questions about the University’s use of in-house investment professionals.

Former HMC bond manager David R. Mittleman earned $18 million in the fiscal year that ended in June, while his colleague Maurice Samuels earned $16.9 million that year. Both men, along with former HMC President Jack R. Meyer, have since left Harvard to form Convexity Capital Management, a firm which recently set an all-time record for start-up hedge funds by raising $6 billion.

Harvard has pledged to invest an additional $500 million in Convexity.

But even with Harvard’s highest-paid managers now gone, disaffection lingers among alumni who believe that HMC salaries are too high.

“What Harvard pays fund managers is unnecessary, inappropriate, and contrary to the values of a great university,” said author and playwright William A. Strauss ’69, an outspoken critic of the HMC compensation structure. “The amount they are paying these individuals is enough that you could take some of that money and have a tuition freeze, to substantially reduce the debt burden on students from middle and working class families.”

In the face of criticism from Swensen and Strauss, Harvard defended its high payouts.

“Harvard’s faculties and students have benefited significantly from the outstanding returns,” wrote Harvard spokesman John D. Longbrake in an e-mail.

“The University is committed to pursuing the right mix of internal and external investing and we will continue to avail ourselves of the best talent in the investment marketplace,” he added.

“Over the past 15 years, HMC has delivered superior investment returns after all fees and expenses paid to our internal and external managers,” wrote Longbrake.

But Swensen’s Yale fund has outperformed HMC by 0.5 percentage points per year since 1990, according to Bloomberg News.

Strauss said he agreed with Swensen’s view that Harvard’s in-house structure is a problem, and suggested that Harvard would have no trouble finding qualified people, especially alumni, who would manage the endowment for a fraction of the multi-million dollar salaries HMC managers have earned.

Swensen, who earned bachelor’s degrees from the University of Wisconsin at River Falls, completed graduate studies at Yale, where he recieved a Ph.D in economics in 1980.

According to the Yale Daily News, he broke a self-imposed media silence last fall in concurrence with the launch of his new book “Unconventional Success: A Fundamental Approach to Personal Investment.”

Swensen did not respond to phone calls seeking comment.

—Staff writer Cyrus M. Mossavar-Rahmani can be reached at crahmani@fas.harvard.edu.

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