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Harvard Management Deserves Reward for Great Performance

Harvard Management Company (HMC), a private company that manages the Harvard University endowment, once again outperformed its benchmark during the most recent fiscal year. Given the overall weakness in the global financial markets during this period, HMC’s performance is particularly impressive.

HMC employs a team of investment professionals that use an active management strategy. The firm invests in a variety of asset classes including U.S. stocks and bonds, international stocks and bonds, private equity funds, real estate, and commodities. Unlike most other university endowment funds, HMC manages the majority of its assets internally instead of relying on outside investment advisors or passive investment strategies. While some have questioned this strategy, HMC’s track record speaks for itself.

During the fiscal year ended June 30, 2001, HMC’s total investment return was -2.7net of expenses). The median endowment fund had a total investment return of -5.7ver the comparable period. This is the ninth consecutive year that HMC has outperformed the median endowment fund. The S&P 500 Index fell 18.8ver the same period (excluding dividends).
Over the past five years, HMC has produced a total investment return of 16.9 ompared with an 11.0otal investment return for the median endowment fund. “The 5.9
nnual outperformance relative to the median fund easily places [HMC] in the top five percent of all institutional funds,” said HMC President & CEO Jack Meyer in his annual performance letter. “In dollar terms, the 16.9
nnual return amounts to $10.5 billion in investment earnings over the five-year period.”

Put differently, the Harvard endowment has not grown to more than $18 billion simply because of alumni contributions; a substantial portion of that growth can be attributed to HMC and its proven investment strategy.
What’s troubling is that HMC is seldom given the credit it deserves for such impressive performance. Far more attention has been paid to HMC’s compensation system than its track record. Indeed, portfolio managers at HMC are paid well: the vast majority of their compensation comes in the form of a bonus that is directly linked to a manager’s performance relative to a benchmark.

If a manager beats his or her benchmark, the size of the performance bonus grows substantially. This is hardly uncommon in the investment management industry, but it has drawn an unusually large amount of attention to HMC. The compensation of HMC portfolio managers is often reported by local news organizations and compared to the salaries of Harvard professors or administrators-the portfolio managers are usually the highest compensated individuals at the University. This is an irrelevant comparison to make, and it draws attention away from what really matters: HMC’s stellar performance.

This year will probably be no different: HMC portfolio managers collectively had one of their best years ever relative to their benchmarks, and they will be paid well as a result-as they should be. But since HMC lost money this year (albeit far less than the S&P 500 or the median endowment fund), there will undoubtedly be more criticism as people focus on absolute, instead of relative, performance. HMC did a terrific job managing the Harvard endowment last year, as in past years, and it’s time for more people to appreciate that.

October 22, 2001
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