Harvard Plays Bully on Wall Street

Harvard has long been regarded as the pinnacle of higher education. But far from the ivory tower, the University is quickly earning a reputation of which it might not be so proud: the most aggressive university on Wall Street.

As Harvard grows its massive endowment, it is adopting the bludgeon of a hedge fund with an aggressive style rarely seen among universities. It has made Harvard an anomaly among higher-education investors, industry observers say.

In the past three years, the University has waged a proxy war against one fund, sought new management for another, and fought a company in court for allegedly underpaying dividends.

Harvard’s investment activism emerged again this summer when the University wrangled with a small closed-end fund, the Korea Equity Fund, unsuccessfully lobbying shareholders to fire its managers.

It wasn’t the first time.

“Usually we would see predatory hedge funds doing that,” says Thomas J. Herzfeld, chairman and president of Thomas J. Herzfeld Advisors, a Miami investment advisory firm that specializes in closed-end funds (see sidebar, “Closed for Business,” p. 7).

Virtually all of the proposals for changes to closed-end funds are submitted by private hedge funds and other investment firms, according to a list provided by Alex Pulisic, senior mutual fund analyst for U.S. Research at Rockville, Md.-based Institutional Shareholder Services (ISS), a firm that publishes recommendations for shareholder proposals.

“Harvard appears to be the only organization of its kind to submit shareholder proposals to closed-end funds,” writes Pulisic in an e-mail.

These proposals from investors are submitted to a company’s management if they win the majority of shareholders’ votes (see sidebar, “A Modest Proposal,” p. 7).

Harvard’s disputes have centered on closed-end funds and other foreign investments in which the University has held large stakes (see sidebar, “Super-Size Me,” p. 7). The international nature of these holdings has closely tied them to one of Harvard’s outside asset managers, Sowood Capital Management, and its principal, Jeffrey B. Larson.

Larson invested foreign equity for Harvard Management Company (HMC)—the firm that invests the University’s endowment, last reported at $22.6 billion—before he left with his HMC team to form Sowood. At both firms, Larson has been an active player in these disputes.

Sowood General Counsel Megan Kelleher says that Harvard is the only investor for which her firm has filed shareholder proposals or sought changes in closed-end funds.

FINANCIAL WARFARE

The most recent fund in Harvard’s crosshairs was Korea Equity Fund, a $68 million closed-end fund investing mostly in Korean securities.

Larson, while still at HMC, was portfolio manager for Harvard’s investment in the fund and mulled taking action to seek new management and greater performance, Kelleher says. When he spun off his team from HMC in July 2004 to form Sowood, Larson took with him the management of Harvard’s stake in the fund.

Last spring, Sowood filed a statement with the Securities and Exchange Commission (SEC) on the University’s behalf, urging shareholders to support a Harvard proposal that the fund be liquidated and severed from Nomura Asset Management, its investment manager. Liquidating the fund would distribute its underlying investments to shareholders.

Harvard’s filing blasted Nomura as “ineffectual and self-serving” and contended that the fund’s performance was lackluster.

The University said it expected to pay consulting firm MacKenzie Partners $75,000 for administering the proxy solicitation.

Korea Equity Fund’s board of directors fired back, arguing that the fund had performed well and that Harvard was simply pursuing its own interests.

“Harvard’s overall investment objective is NOT to remain in closed-end funds like yours,” one filing stated. “Apparently, the only idea it has is to exit your Fund through liquidating it.”

Harvard did win some battles in the proxy war. ISS recommended that its clients vote in favor of the University’s proposals.

But Harvard, the majority shareholder in the fund, lost the support of Nierenberg Investment Management’s D3 Family of Funds, which held the second-largest stake in the fund. In an interview with Dow Jones Newswires, the firm’s president, David Nierenberg, said that the benefit of liquidation would be small due to administrative and legal costs, as well as commissions.

The showdown between Harvard and the Korea Equity Fund came on Aug. 10 at the fund’s annual meeting at its offices in lower Manhattan. Days later, when the votes were counted, Harvard had failed to secure a majority, garnering 42 percent of the votes of outstanding shares.

But Kelleher says that non-votes were counted in management’s favor, and that among shares that were actually voted, 65 percent favored Harvard’s proposal.

For some observers, Harvard’s failure to restructure the fund comes as no surprise.

“It’s very difficult to get a liquidation measure passed by shareholders, if only because management lobbies strenuously against it,” John Waggoner, a financial columnist for USA TODAY who has studied Harvard’s investments in closed-end funds, writes in an e-mail. Waggoner notes, however, that shareholder activism, even if unsuccessful, can prod management to take action to boost a fund’s share price.

Low voter turnout is also characteristic of shareholder proposals.

“Corporate fund shareholders are notoriously apathetic,” says Cecilia L. Gondor, executive vice president at Thomas J. Herzfeld Advisors. “To get them to vote is difficult.”

Its proxy campaign having failed, Harvard sold its holdings in Korea Equity Fund for $17.1 million at the end of August.

Neil Daniele, secretary of Korea Equity Fund, declined to comment on the results of the dispute and Harvard’s sale of its shares. Harvard and Sowood do not discuss specific investment transactions, and Jack R. Meyer, the departing president of HMC, declined to comment on the University’s investment activism, citing his nearing departure. Meyer is scheduled to leave to start his own firm after Sept. 30.

AN ACTIVIST RÉSUMÉ

Harvard brought a wealth of battle experience to its dispute with Korea Equity Fund. Last year, Harvard wrestled with an unrelated investment, the Korea Fund.

In March 2004, Larson, then still at HMC, submitted a letter to the Korea Fund’s board, blasting the fund’s performance under its manager, Deutsche Investment Management.

Larson warned that if Harvard were to feel that Deutsche was swaying the board to serve its own interests, the University would “seriously consider taking steps necessary to remove that influence.”

Only months later, it did just that, mounting an unsuccessful proposal at the fund’s annual meeting to terminate the management agreement between Deutsche and the fund.

This August, Harvard returned its Korea Fund stake to the fund in exchange for a slice of the underlying net assets, capturing much of the discount it had protested.

Harvard’s disputes occasionally have escalated to the courts. In Jan. 2003, Harvard moved to terminate Templeton Asset Management as the investment manager for two closed-end funds, the China World Fund and the Dragon Fund. Templeton sued Harvard, accusing it of “strong-arm investment tactics.”

One week later, Harvard countersued, alleging that Templeton was improperly blocking its efforts to put a proposal in front of shareholders. The two sides settled their dispute when Templeton, in a partial victory for Harvard, allowed the University to sell back its $115 million investment at a price above market value.

In another legal investment dispute, Harvard has struggled with Russian oil company Surgutneftegaz (Surgut), which it alleges has underpaid its dividends to American shareholders. The investment has been managed by Larson, first at HMC and now at Sowood.

Harvard will bring its case before the American Arbitration Association in New York, where it will first seek to have its claim classified as a class action.

Harvard’s lawyer at Ropes & Gray, Robert Skinner, said that Surgut had sought to move the dispute from arbitration to Russian courts. While Surgut’s motion was unsuccessful, it is appealing the judge’s decision. The arbitration and appeal will proceed concurrently.

—Staff writer Nicholas M. Ciarelli can be reached at ciarelli@fas.harvard.edu.