Harvard has the world’s largest endowment but it has been performing poorly for the past few years, losing ground to bitter rivals Yale and Princeton.
Harvard recently appointed Stephen Blyth as CEO of its endowment in the hope of arresting the slide. While the Ivy League school remains the richest in the world, it is losing out to Yale and Princeton due to the poor returns on its investments, writes Michael McDonald for Bloomberg.
Harvard aiming to fight back against Yale in battle of endowments
Yale’s own endowment has outperformed Harvard’s by nearly 4% in each of the last 5 years, which adds up to billions of dollars. Although Harvard’s endowment gained 5.8% year-on-year through June, that was still 2% below the Ivy League average.
Following his appointment Blyth vowed to leverage Harvard’s alumni network in search of better returns. He wants to use alternative assets such as private equity and venture capital to drive returns.
Overhauling the board of directors was the first step in a long process, which has also seen Blyth cut a layer of top management. At the same time he has restructured pay packets and reallocated funds to different areas of the portfolio, which may mean bigger bets on private equity and hedge funds.
Revamped culture under new CEO Stephen Blyth
Blyth could also face an increasingly hostile political environment, with some Congressmen questioning why endowments pay no tax. Super-wealthy colleges are also facing calls to spend more on financial aid.
In order to usher in a new era of openness, Blyth is reconnecting with investment manager alumni who were neglected by previous CEO Jane Mendillo. After heavy losses during the financial crisis, Mendillo concentrated her efforts on repairing the damage.
She cut back on risk and sold over $1 billion in private equity stakes at a discount in order to raise cash. Blyth is taking a new direction following his promotion, committing to private and public equity funds.
Several factors are working against him, including predictions of lower returns on equity due to reduced global growth. Another concern is the size of Harvard’s endowment, which employs 265 staff and can make it difficult to find all of the opportunities.
Harvard pays its endowment staff more than rivals, which provoked criticism after years of poor performance. Blyth has responded by tying bonuses tighter to overall returns in an attempt to encourage different asset classes to collaborate with each other.