Harvard’s Post-Crisis Endowment Strategy

0

Harvard’s Post-Crisis Endowment StrategyJane Mendillo Endowment Strategy

By Justin Kermond
January 28, 2014
Go to page 2, 3, Next

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.

Play Quizzes 4

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.

Morningstar Investment Conference: What To Do During The Fed Rate Hiking Cycle

Federal reserveThe U.S. Federal Reserve is treading carefully with raising rates amid the widespread economic, macro and geopolitical uncertainties sweeping around the world. The Fed raised its target level as high as 20% in the early 1980s to deal with runaway inflation, but we're a far cry from that today — a time when inflation threatens Read More

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.

Go to page 2, 3, Next

Display article as PDF for printing.

Would you like to send this article to a friend?

Updated on

The Advisory Profession’s Best Web Sites by Bob Veres His firm has created more than 2,000 websites for financial advisors. Bart Wisniowski, founder and CEO of Advisor Websites, has the best seat in the house to watch the rapidly evolving state-of-the-art in website design and feature sets in this age of social media, video blogs and smartphones. In a recent interview, Wisniowski not only talked about the latest developments and trends that he’s seeing; he also identified some of the advisory profession’s most interesting and creative websites.
Previous article Code Red or Red Herring? Mauldin and Tepper’s Code Red Reviewed
Next article Tiger Global Management Starting Eighth VC Fund

No posts to display