A Tale of Two Endowments

Should Harvard abandon decades of established investment practices and, in short, start investing like Yale does? Can it afford not to?
By Andrew M. Duehren and Daphne C. Thompson

By Derek K. Choi and Jessica M. Zhu

When University President Drew G. Faust and the investment professionals who oversee Harvard’s endowment seek advice, they sometimes turn to an old friend: David F. Swensen, the Chief Investment Officer at Yale University.

Over the last few years, the Boston fund managers have had a lot to talk about with their New Haven counterparts. In fiscal year 2016, HMC returned negative 2 percent on its portfolio, a loss that, together with other financial flows like the $1.7 billion HMC distributes to fund University operations, combined to an almost $2 billion drop in the endowment’s total value. In a difficult market year that saw many large institutional investors lose money, Yale posted 3.4 percent growth for fiscal year 2016—outpacing Harvard by more than 5 percent. Its endowment size is now $25.4 billion, compared to Harvard's $35.7 billion.

Not that Yale’s superior financial performance is anything new. Since fiscal year 2006, Yale has outpaced Harvard every year except two: fiscal years 2008 and 2010. Yale’s winning streak in financial markets is almost as dominant as Harvard’s on the gridiron.

Now, with a search for its fourth CEO in 10 years underway, Faust and Harvard’s investment leaders are wondering whether Harvard should more closely emulate Yale. At issue in particular is Harvard’s “hybrid” investment model, an idiosyncratic system in which the University employs a robust in-house staff of almost 200 and retains a number of external money managers. Yale, on the other hand, almost exclusively invests through outside funds, like many other university endowments. Fewer than 40 people work for the Yale Investment Office.

“Yale never had the combination internal-external that we had. They didn’t build up an organization like HMC, so that’s a sharp contrast. We look to see what choices they’ve made and how we might learn from them,” Faust said in an interview Tuesday.

HMC executives have done more than just watch Yale's progress from a distance. According to Faust, Jane L. Mendillo, who stepped down as CEO of HMC in 2014, met with Swensen. When Stephen Blyth, who resigned as CEO in July after only 18 months, took charge in 2015, he met with Swensen to discuss endowment investing. And Paul J. Finnegan ’75, the University’s treasurer and a member of the Harvard Corporation, the University’s highest governing body, has met with him.

To some, these discussions should make the choice easy. Of the nearly 100 universities with endowments over $1 billion, “Harvard’s the only one that has tried has tried to do a lot of investments internally,” said Charles A. Skorina, who manages a firm that recruits financial executives. “We’ve run a 10 year experiment, so we’ve had 10 years to test their theory. It failed.”

At a time of transition at HMC, the Yale Investment Office has become an example of successful endowment investing and leadership. The next leader of the wealthiest university endowment in the world will have to consider: Should Harvard abandon decades of established investment practices and, in short, start investing like Yale does? Can it afford not to?


Harvard’s internal management system has not always been the subject of scrutiny. When Jack R. Meyer served as the CEO of HMC between 1990 and 2005, he led Harvard’s internal management team to more than a decade of explosive growth, nearly tripling the value of the endowment and establishing Harvard as one of the leading institutional investors in the world.

But there was a catch. To support such a staff of internal managers that could so consistently perform well, Harvard had to pay big bucks, amounting to tens of millions of dollars to individual managers who performed well. Some top-performing managers made more than $30 million in a single year. The compensations—competitive with salaries in the hedge fund industry—did not sit well with some at Harvard, and alumni penned a letter to then-University President Lawrence H. Summers decrying the salaries. At the time, even Swensen criticized Harvard’s compensation models as excessive.

“I have long said that the structure of Harvard Management is inherently unstable,” Swensen said in 2006. “You can’t pay managers astronomical amounts of money because it tears at the fabric of [the university].”

Eventually, the mounting pressure on Harvard’s compensation packages—packages that, proponents argued, allowed HMC to remain competitive—became too much. The University placed a “significant” cap on HMC executive salaries in 2004, and Meyer resigned in 2005, taking four top-paid senior managers with him.

Without competitive salaries, Harvard would not be as well equipped to lure top money managers to HMC, a change that some experts said marked the beginning of the end for the internal end of HMC’s hybrid management system.

“The problem actually began with Harvard doing too well, meaning they made too much money and they paid their managers $10, $20, $30 million. At a place as liberal as Harvard is, that made people go crazy, especially the faculty,” said Tim J. Keating ’85, the president of Keating Wealth Management. “Therein begins the unraveling.”

While Yale’s reliance on external managers meant that it pays its internal executives much less in the early 2000s, the university was all the while compensating the external fund managers at a higher rate. For Randolph B. Cohen ’87, a finance professor at Harvard Business School, a shift towards outside managers is more expensive for the University, even if it does obscure some of the details of executive compensation.

“It's probably a lot cheaper to hire top quality people full-time to execute bond-trading or similar strategies for Harvard than it would be to pay those same people to manage that money the same way inside a hedge fund,” he wrote in an email.

Still, HMC has not compensated employees anywhere near the levels reached in the early 2000s—Stephen Blyth made $8.3 million in calendar year 2014—and the performance of its internal managers has increasingly become a subject of scrutiny and concern.

“At some point, it simply won’t make sense to maintain the existing format,” Meyer said in 2004. “There is a point where we would simply move to an external model.”


From its office high in the Boston Federal Reserve Building, HMC runs a sprawling operation, with more than 200 employees managing an endowment comprised of over 13,000 individual funds. And beyond its headquarters over the Boston Harbor, HMC also farms out a number of its investments to external managers, adding “breadth and depth to HMC’s market perspectives,” according to its website.

The Yale Investment Office, by contrast, employed a leaner crew of 31 in 2015 to run an endowment of comparable size.

Harvard’s “hybrid model” of investment has been the firm’s signature for years. But if interim HMC CEO Robert A. Ettl’s 2016 report is any indication, HMC may be moving towards a model more like the Yale Investment Office’s tightly-run, externally-managed ship. Some other peer institutions, including Stanford and MIT, invest their endowments through external managers and have recently outperformed Harvard.

In June 2016, Ettl wrote in his report last week, HMC reduced the size of its internal public equity team and moved most of the investments to outside managers. Public equities returned a negative 10.2 percent in fiscal year 2016, falling short of its negative 6.1 percent benchmark; the portfolio was one of HMC’s worst-performing.

“That’s one move that says, okay, internal-external we’ll decide on the basis of where we can do the best investing,” Faust said of the public equities transition.

For a number of university investing experts, outsourcing public equities should be just the first step in a long-needed divorce with HMC’s hybrid model and a transition to a system emulating the Yale Investment Office.

Keating, a Leverett House alumnus and donor to the University, said he wants his gifts to have as much impact as possible—and under HMC’s current organization, that is not happening.

“Turmoil has created chaos, which has led to subpar investment returns,” Keating said. “It’s time for Harvard to jettison the hybrid model and move exclusively to the external model.”

One advantage of an externally-managed endowment is the ability to lay off underperforming managers on short notice, according to Roger G. Ibbotson, a hedge fund CIO and finance professor emeritus at the Yale School of Management.

“It’s much easier to fire external managers than it is to fire your internal staff,” Ibbotson said. “There’s a lot of internal politics that’s involved in all of that, so it’s harder to adapt.”

Whether HMC continues to dismantle its in-house fleet, though, will largely be the decision of the fund’s next CEO. Two top candidates reportedly in the running, Columbia’s N.P. Narvekar and Rockefeller University’s Amy C. Falls, both have experience running relatively small internal teams and outsourcing their investments.

“Continuing that path to evaluate external-internal, to evaluate what has led to disappointing performance, that’ll be a challenge for the new leader,” Faust said.

Whoever takes the reins at HMC, Skorina said, will have some difficult decisions to make.

“Are they going to give the new person the authority that they need?” Skorina said. “It’s almost like HMC is a sacred cow. Are they prepared for the CEO to fire 200 people? Do they have the guts for that?”

The possibility of reparative change with a new CEO at HMC, though, comes with a price: With every transition of the fund’s top office comes a shift in strategies, and costs are incurred as that leader sells off old investments and purchases new ones. Harvard is currently searching for its fourth permanent CEO since 2006.

Yale has had the same chief executive since the Reagan administration.

“The fact is that Yale has a rock star,” said Steven N. Kaplan ’81, a professor at the University of Chicago’s Booth School of Business. “David Swensen is a rock star and he’s super impressive. I think the goal for Harvard is to find someone equivalent.”

—Staff writer Andrew M. Duehren can be reached at andy.duehren@thecrimson.com. Follow him on Twitter @aduehren.

—Staff writer Daphne C. Thompson can be reached at daphne.thompson@thecrimson.com. Follow her on Twitter @daphnectho.

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