Thursday, January 26, 2017

Evidence that you can't get what you don't pay for

It was just over 16 years ago that the Harvard Management Company and investment chief Jack Meyers parted ways.  Meyers had quintupled Harvard's endowment, growing it from $5 billion to $25 billion.  He was paid a pittance for that performance, by Wall Street standards at the time. Nevertheless, the Harvard alumni were outraged when they learned he was paid $7 million in one year, even though his compensation was tied to beating established benchmarks.   Apparently the alumni were confident that comparable returns could be had for less cost.

It didn't work out that way.

 Today's Wall Street Journal [paywall] reports yet another major shakeup for the Harvard Management Company.  The endowment has annualized gains over the last 10 years of 5.7%, well below Yale's 8.1% and the second lowest in the Ivy League.  Four different heads have tried to meet the return targets over the last decade, with the latest starting last December.

The new plan:  Outsource almost everything, and lay off 230 employees.

The nice thing about this approach is that the alumni never need to know how much the outside managers are being paid.  If they ever get good endowment returns again, they don't have to lose sleep over whether the manager was paid too much for achieving them.

A new spirit of noncompetition at Harvard Management is revealed in the closing paragraph of the WSJ piece:

Remaining staffers will focus on Harvard’s portfolio overall instead of on specific asset classes. Mr. Narvekar plans to tie staffers’ pay to the endowment’s overall performance instead of that of their asset class starting in fiscal year 2018.
We'll be watching to see how that turns out.

1 comment:

JLM said...

Yale has been incredibly lucky that David Swensen loves his job more than money. His skills at overseeing a largely outsourced investment program are hard to replicate. Just ask the endowments and pension funds that have tried. If Harvard's football team can't beat Yale (admittedly, last fall's win was a long time coming) its endowment probably can't either.