After losing $2 billion last year while markets mostly moved higher, Harvard Management Co. announced big changes in the way it oversees the world’s largest university endowment. Kicking off the new era, it is getting rid of half of its 230 employees and farming out management of most of its money. Alumni and other interested observers should expect to see a much simpler and cheaper endowment in the near future.
Today’s missive will explore what this change foretells, but first, a brief reminder of HMC’s recent history. Under the direction of Jack Meyer, president of endowment manager from 1990 to 2005, returns were stellar. Then Harvard President Lawrence Summers get involved, ignoring warnings from Meyer that the university was “mismanaging its basic operating funds” and investing too much in risky stocks, bonds and alternative investments.
In what can be best described as an example of hubris and political correctness run amok, Meyers and his team were forced out. As my colleague Ben Carlson observed, “Things have been slowly going downhill ever since.”
Since 2005, the fall from grace has been stunning. There are a few lessons here worth noting:
No. 1. When a money manager is outperforming the benchmarks, leave them alone: Under Meyer, HMC had captured lightning in a bottle. Messing with that rare and delicate thing is simply foolish. Harvard had to learn that the hard way.
No. 2. Simpler and cheaper beats complicated and expensive: Investing luminaries such as Charles Ellis, Jack Bogle and Burton Malkiel have long argued that the simpler and cheaper a portfolio is, the better its long-term performance. This is true even for a $37 billion endowment like Harvard’s.