Some Alumni Encouraged by HMC Changes

Federal Reserve Bank of Boston - HMC Office
Harvard Management Company is housed in the Boston Federal Reserve building.
With Harvard Management Company readying to undergo the most dramatic change to its investment strategy in decades, some alumni said they are cautiously optimistic about the shift towards external management, while others remain focused on compensation structures at the firm.

Last month, HMC announced it would all but gut its internal management teams and reduce its workforce by nearly half by the end of 2017. The firm managing Harvard’s $35.7 billion endowment will also make critical changes to its compensation formula, tying the pay of its executives to the overall performance of the endowment instead of to the performance of individual asset classes.

Some alumni said they are hopeful that the changes will improve the firm’s performance, which has faltered in recent years. In fiscal year 2016, Harvard posted the worst returns on its investments since the height of the financial crisis at negative 2 percent, contributing to a nearly-$2 billion drop in the endowment's value.

Robert B. Shetterly ’69, a member of a group of alumni which has long criticized “excessive” executive compensation at HMC, said laying off the firm’s internal managers is warranted “especially if they weren’t doing that good a job in the first place.”

But others are doubtful that the changes are the cure-all for HMC’s investment woes. Paul J. Zofnass ’69, a donor to the University, said he does not believe one investment model is inherently better than the other.

“I’m not convinced that internally is any more or less effective than subcontracting it out for somebody else to do,” Zofnass said. “The real issue is—whether you’re doing it internally or subcontracting it out—are the right decisions being made in terms of the investments?”

For years, HMC had stuck by its unique “hybrid” investment strategy, managing most of its assets internally. Experts predicted HMC’s new investment chief N. P. Narvekar would align the firm’s investment strategy with the external models in place at peer institutions, like Yale and Columbia.

Laurence L. Brunton ’69 said he is not particularly worried about the endowment’s lackluster performance, but rather the “immoral” payouts the Company’s managers receive.

“I still would wonder what they’re going to pay for these services,” Brunton said, referring to the new external managers.

Although some Harvard alumni have voiced support for change in investment model, others maintain that HMC’s executive compensation formula, if not seriously addressed, might undercut any positive changes to the firm.

According to Narvekar’s announcement, the firm’s new pay structure “fully aligns the generalist investment team with the performance of the overall endowment.” In response to criticisms of executive compensation at HMC, administrators have argued that they are making changes to improve the system.

David E. Kaiser ’69 said he and members of his class have sent “dozens” of letters to University President Drew G. Faust and members of the Harvard Corporation in an effort to learn more about the firm’s pay structure. While University Treasurer Paul J. Finnegan defended HMC’s compensation model in a Dec. letter to the group, Kaiser said he is unsatisfied with Harvard’s replies to his concerns.

“They’ve never, in their responses to us, given us a response,” Kaiser said.

—Staff writer Brandon J. Dixon can be reached at brandon.dixon@thecrimson.com. Follow him on Twitter @BrandonJoDixon.

—Staff writer Leah S. Yared can be reached at leah.yared@thecrimson.com. Follow her on Twitter @Leah_Yared.

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