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Rethinking Harvard's Investment Strategy

Harvard Management Company

By Gregory B. Kasowski

When Jack R. Meyer arrives at the Harvard Management Corporation (HMC) president's office on Atlantic Ave. this September, he will take control of a vast investment empire which has expanded through a series of financial markets--each one more sophisticated and riskier--since its creation in 1974.

The last years in office of HMC founder Walter M. Cabot '55 have been marked by rapid movement of the more than $5 billion endowment into less traditional investment areas, including venture capital and leveraged buyouts.

Under Cabot's guidance, the endowment has grown markedly different from the staid, conservative portfolio that the University held when HMC was created to managed the University's holdings in 1974.

And when he arrives this fall, Meyer will inherit an endowment which has grown from $1 billion to more than $5 billion in just under 20 years.

The endowment is also much more complex than in its early days. During the past few years, HMC has become heavily involved in risky, high-yield investments including real estate speculation and LBOs, in which an investor borrows heavily to take over a publically traded firm.

According to the figures from this year's financial report, the University now holds over $1 billion in such areas--more than one-fifth of the entire endowment.

The move away from large publicly-traded stocks and major bonds, which are the typical staples of large academic endowments, has brought the University a reputation for enterprising and creative investing for such a large institution--but at the same time raised ethical concerns.

Historically, Cabot's willingness to enter into such activities and take risks avoided by others has reaped the University high returns on investment.

As well, Cabot was praised by many in the investment field for protecting Harvard assets during the Black Monday market crash in October, 1987 and actually turning a profit for the University at the same time most investors suffered massive losses.

But the University has not fared so well in the financial realm during recent years, and questions about the propriety of Harvard's involvement in LBOs, which analysts and some in Congress have criticized for hurting the economy, have lingered.

Cabot was criticized roundly in the media for missing out on the boom which followed the 1987 crash, and last year, the performance of Harvard holdings fell below the major indices and the market averages.

Even the move into risky area--which is still heralded by Cabot and other HMC insiders--has been attacked by several observers who question the logic of devoting resources to a field in which average returns have dropped significantly over the past years.

But the commitment of the University to this type of investment is definitely firm. Treasurer D. Ronald Daniel says that although the University would not want to put more than one-fifth of the endowment into such holdings, it definitely will not diminish its involvement.

In fact, HMC has institutionalized the private investment holdings by creating a special group of companies collectively known as the Aeneas Group.

The two young money managers assigned to run Aeneas, Scott M. Sperling, 32, and Michael R. Eisenson, 34, have also attracted attention in the Harvard community.

Riding the investment wave of the late 1980s, the two Business School alumni compiled an extremely high return on investment and were the highest paid Harvard employees, according to a 1989 tax return. Their compensation of over $1 million annually was six times what Bok makes.

But questions of ethical oversight have arisen from the HMC expansion into the higher risk areas, known as private placement investments.

Unlike larger public stocks, investments like venture capital and LBOs do not involve direct common share voting--whichenables the University to voice its thoughts onissues of social responsibility.

When Harvard created the Advisory Committee onShareholder Responsibility (ACSR) in 1972, theUniversity became a leader in the area of socialresponsibility among large investmentinstitutions.

But the HMC entry into private placementinvestments has left the ACSR deprived of a formalvoice on the ethical issues concerning more than a$1 billion chunk of the endowment.

The realization of their limited jurisdictionleft many ACSR members shocked, although no formalchanges have yet been proposed to give the body astronger voice.

As Meyer prepares to leave his post as atreasurer with the Rockefeller Foundation and headnorth, he says that his priority will be to ensurethat the endowment is properly distributed amongthe various investment types.

Endowment's Weakness

"If the endowment has one weakness, it iscontext," Meyer says. "The way pieces fit togetherhas to be worked on. We have to make sure that ourpolicy is suited to Harvard's spendingrequirements and risk requirements."

But Meyer says that this is the only area wherehe could find fault in the current workings of theHMC that Cabot has managed for over 15 years.

Harvard Management is not broken," Meyer says,defending Cabot from recent press criticisms."It's not my responsibility to fix it.

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