Harvard's Changing Financial Family

A New Open Marriage

Last year, when George Putnam '49 took over as Harvard's new treasurer, his first job was to carefully study the way that Harvard's money had been managed in the past and to figure out the best way to manage it in the future.

As Putnam and President Bok saw it, there were three basic alternatives for Harvard's $1.4 billion endowment:

* Continue the present system having one outside investment firm manage the day-to-day investment operation and report periodically to the Corporation;

* I Give part of the endowment to several different investment firms and encourage them to compete to produce the highest possible annual return; or,

* Establish an internal investment management company or department to handle all, or most of the endowment within the Corporation itself.


When he first began to consider the three alternatives, Putnam said he was leaning to the second alternative, but that he would carefully study all of them before making his recommendations to Bok and the Corporation. But in the course of a meeting with over 40 university financial managers and money men from almost every major foundation or pension fund--all of whom had a slightly different blend of the three alternatives--Putnam became intrigued with the idea of setting up an internal management company for Harvard. The idea was a novel one for universities and the possibilities for management innovation that internal management posed were unique for any large endowment.

So last fall, Putnam recommended to the Corporation that Harvard set up its own independent management company to handle most of the endowment and that the rest be divided up among several specially-selected outside firms. The decision to keep about one-third of the portfolio with outside managers resulted from a combination of factors that Putnam considered. First, President Bok expressed a very strong preference for not keeping "all of the University's eggs in one basket." Second, Putnam and Bok wanted to ensure that the University maintained close contact and good public relations with the financial world. But most important, they both saw that outside firms could offer the new management company a great deal of help and advice and provide a yardstick for some indication of how the new management company was doing its job.

The Corporation liked the idea and in the fall, Harvard announced that it would establish the Harvard Management Co. to take over $1 billion of the $1.4 billion endowment on July 1. Putnam's next job was to find someone to head the new company and to locate office space in Boston's financial district.

In February, Putnam announced that Walter M. Cabot '55 would become Harvard Management's first president on April 1. With that announcement and the locating of physical space for the company at 70 Federal St., Putnam's direct role in the company's affairs ended.

At that time, changes from the previous era of State Street Research and Management Co. began to surface. Bok, Putnam and Cabot--who is the nephew of former treasurer Paul C. Cabot '21--are part of a new generation in Harvard financial affairs. As such they are now more daring and interested in innovation than their predecessors at State Street. When Cabot was named, it became apparent that the younger generation was preparing to embark on some bold new ideas for financial management.

Putnam and Cabot began discussing the interchange the new management company would have with the several outside firms managing the rest of the portfolio. They expanded the idea that these companies could help Harvard Management get off its feet into a broader concept of a symbiotic relationship among all of the outside firms and Harvard Management.

The idea of choosing firms on the basis not only of the rate of return they can produce for the portfolio, but also on the basis of the kind of help they can offer to the overall portfolio management is a strikingly new one in financial circles. Most outside managers assume they are going to be asked to compete one with another and with the main portfolio and ranked in the order of revenue they produce. This system of competition puts a great pressure on short-run investment policy because the companies are usually ranked against each other and those at the bottom are replaced, while those at the top get more of the institution's money.

Putnam and Cabot are concerned that such short-run pressure may actually be harmful in the long run and that therefore, the heavy emphasis on competition among different firms managing the same endowment may not be the hhalthiest policy for the University to follow. The concept of complementary relationships is in its experimental stage--only the Ford Foundation and Harvard, among major endowments, are currently playing with it--but Cabot and Putnam expect it to become more prevalent in the future. The Ford Foundation has studied the new idea carefully and kept records of the methods they have used in going about it that they have made available to Harvard. Harvard, too, is keeping the same kind of records to share with Princeton--which has already shown an interest--and other universities contemplating adopting the idea in the future.

Cabot will ask the outside firms Harvard Management selects to manage $400 million of Harvard's endowment to join in an informal partnership for the exchange of investment information.

He plans to hire a small staff of eight or ten professionals for his company, but to supplement them with information derived from the personnel and facilities of the outside managers.