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Alumni Group Critiques Harvard’s Investment Strategy in Letter to Faust

By Brandon J. Dixon, Crimson Staff Writer

UPDATED: March 1, 2017 at 12:55 p.m.

More than 40 members of the Class of 1981 suggested significant changes to Harvard Management Company’s investment strategy in a letter the group penned to University President Drew G. Faust.

In the letter, the alumni argued Harvard should be equally as concerned with the negative effects of lackluster annual endowment returns as with long-term gains. The letter comes after a particularly dramatic short-term loss: in fiscal year 2016, Harvard returned negative 2 percent on its investments.

“Managing the Harvard endowment for maximum long term gain makes sense if endowment income is not critical to the fulfillment of the annual budget,” the letter reads. “However, clearly the year-to-year endowment income is critical and, in a bad year, can have a severe financial impact on the Harvard community.”

Along with the negative investment returns, several financial flows, including the $1.7 billion HMC allocated to the University’s budget, the value of Harvard’s endowment dropped by almost $2 billion last year. Following the underwhelming financial performance, the Graduate School of Arts and Sciences announced it will cut the number of students it will admit this year by 4.4 percent.

Writing under the name “Harvard-Radcliffe Class of 1981 Collaboration,” the alumni largely praised recent changes to HMC’s investment strategy, writing that the reduction in personnel and shift to outside managers is a “reasonable direction” for the firm to move in.

“This approach has been the successful standard of other university endowments, including MIT and that school down in Connecticut,” they wrote. “We hope it will be similarly beneficial to Harvard and to all members of the Harvard community.”

Last month, HMC’s new chief executive N.P. Narvekar announced sweeping changes to the firm’s investment strategy including the reduction of the firm’s internal staff by roughly half and the elimination of the majority of its internal management teams.

The class noted that they expect their suggestion “may reduce long term gains” but added that “it may also prevent short-term crises, the kind that Harvard will survive, but that vulnerable members of the Harvard community might not.”

In an emailed response to the letter, Faust wrote that she was “pleased to hear from alumni” and would direct the group’s concerns to personnel at HMC.

Echoing concerns raised by a group of alumni from the Class of 1969 that has long rallied for changes to HMC’s executive compensation structure, the 1981 cohort also questioned “why a generous salary is somehow insufficient motivation for fund managers.” Still, the letter commended HMC’s move to tie executive compensation to the endowment’s overall performance instead of the performance of individual asset classes.

“However, requiring a positive return, at least relative to the overall market, before compensatory bonuses are considered does not seem an unreasonable condition for negotiation during the ongoing reorganization,” they added. “This would reassure those of us who have contributed to the endowment, and who intend to continue contributing, that our donations are supporting the Harvard community as intended.”

Layoffs are expected to occur by the end of the calendar year, and the shift to external managers is expected to be completed by the end of fiscal year 2017, which ends in June.

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