Harvard’s Post-Crisis Endowment Strategy
January 28, 2014
Jane Mendillo took the helm as CEO and president of Harvard Management Company (HMC) in 2008, after the endowment suffered a devastating $10 billion loss, which depleted its worth by more than 27%. Under her leadership, HMC has emerged from the crisis with innovative changes in its policies and processes regarding asset allocation and risk management of alternative assets.
Although the endowment’s assets were valued at $32.7 billion as of June 30, 2013, it has yet to recover to its pre-crisis size of over $36 billion. More than half – 55% – of the endowment is invested in alternative assets and that allocation has increased since 2008.
In a recent meeting of the Boston Security Analysts Society (BSAS) on the challenges and opportunities for investors in 2014, Mendillo discussed these changes in a “fireside chat” moderated by Stacey Marino, a BSAS board member and senior portfolio manager and vice president at State Street Global Advisors.
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Mendillo discussed the steps she took to help the endowment recover from its post-crisis lows, including how her thinking evolved on the excess return she expects from private equity to compensate for its lack of liquidity, the advantage of taking a more controlled and direct approach to real estate investing, the advantage of managing investments internally and externally, the disadvantages to size, the opportunistic approaches to alternative investments, and the understanding of risk exposure with hedge funds.
HMC’s singular mission since 1974 has been to support Harvard by investing and enhancing the University’s financial resources for the long term. The underlying framework of the Harvard endowment is the policy portfolio, a concept that has been employed by HMC for many years. It is a theoretical portfolio allocated among asset classes to maximize potential return and minimize risk over the long term. The policy portfolio differs from a traditional stock/bond portfolio in that it includes allocations to less traditional and less liquid alternative asset categories, such as private equity, real estate, absolute-return hedge-fund strategies and natural resources. The endowment is managed with a hybrid model, employing both internal investment professionals and third-party managers.
Mendillo said that HMC needed to focus on three things and “reinvent” to move forward after the crisis. They needed to be positioned for growth, as Harvard has a tremendous need for capital from the endowment to spend toward its operating budget. The portfolio managers needed to be very cognizant of and provide more thought-leading risk management. They needed to innovate structure around how they think about liquidity versus illiquidity. Due to the troubles in managing illiquid exposures during the financial crisis, the pendulum has swung back toward more liquid alternative assets. The portfolio’s 55% allocation to alternatives is “about the maximum of what we would like to do, given the needs for liquidity from our portfolio for the University and for investment returns,” Mendillo said.
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