The Times on Harvard’s Endowment
Posted on February 23rd, 2009 in Uncategorized |
Over the weekend, Geraldine Fabrikant in the Times wrote an intriguing piece about Jane Mendillo, who had the misfortune of stepping into the job of head of the Harvard Management Company just before the stock market crashed.
Her critics say that Ms. Mendillo’s overall investment strategy is unclear and that while the crisis erupted faster and with more magnitude than could have been predicted, she could have moved more quickly to manage the risk. Supporters counter that her predecessors essentially left her hamstrung with a portfolio that was illiquid, and give her high marks on investing acumen.
The article implies that some of Harvard’s riskier investment stratagems, which looked so promising in happier times, are costing the university billions now.
And it suggests to me that Harvard is in a very delicate position at the moment: In a time of crisis, it has a new president and, perhaps even more important, a new investment management head—its third in, what, the last four years?—both of whom can only be described as untested. That status is, of course, rapidly changing.
Will Drew Faust and Jane Mendillo rise to the occasion?
Because make no mistake, this is a watershed moment in Harvard’s history, probably the most important one—even more than the events of 2005-2006—since 1968. How these two women fare will affect Harvard’s culture and growth for years to come.
6 Responses
2/23/2009 7:31 pm
I think the predecessors of both, and the economy, have taken care of the growth “for years to come”. JM will necessarily pursue a less risky course, and I thought she came across well.
2/23/2009 10:13 pm
Richard T,
Why will Jane Mendillo necessarily pursue a less risky course and how are you defining less risky?
Best,
2/23/2009 11:23 pm
I’m out of the gate out of my depth, Sam, and the shorter your questions the bigger the trap as I’ve noticed. As I understand it there are constraints with regard to immediate options which will perforce reduce risk and reduce returns — or increase both, intolerably as regards the former given where we are. hence RB can’t expect terrific growth in the near or middle future from DF or JM, since the future is so uncertain.
I also assume the apparent illiquid problems will have an effect on near-term policy.
As I understand it the only major criticism of JM so far is that she might have more rapidly tried to extricate the portfolio from the bad position it found itself in when she inherited it by acting more rapidly in the third quarter of 08. But even ex-presidents of Harvard and experts on its Corporation were opining that nobody could have predicted these things, etc., etc.
But more importantly, what do you think?
2/24/2009 5:54 am
I know from experience that Sam is precise about the meaning of risk, as well, Richard.
That said, Mendillo herself implies that it will be some time before Harvard again has 105% of its assets invested….one might also expect that there will be greater skepticism about weighting the endowment so heavily in illiquid investments.
Sam?
2/24/2009 10:09 am
1. A good friend of mine was on The Board of Wellesley College and headed up the investment committee. He is a very, very smart guy when it comes to investments (just look around and see how much money he’s given to Harvard). He thought Ms. Mendillo was a superstar investment manager, in a quiet understated way, and was just the right person for HMC. He was sorry that Wellesley lost her. I’m sure she did all she could, as soon as she took over, to mitigate the impact that the downturn in the markets were causing. Investment hindsight, as I’ve mentioned a number of times on this site, is always perfect. It’s the foresight that separates the women from the girls. From what I know from my friend mentioned above and others that are very close to HMC, my bet is that JM will turn out to be a very good choice.
2. RB, I’m not privy to what is going on at HMC with regard to investment policy. No one asks my advice anymore. Therefore, I don’t know what the weightings will be and how illiquid investments will continue to fit into the portfolio.
3. RT, I wasn’t trying to trap you (I would never do that to my wife’s Latin professor; you might give her a bad grade in the next course). Was merely trying to find out from you, a senior faculty member, what your thoughts might be with regard to risk as it applies to HMC.
4. Richard T is right; risk is a term that is most often used incorrectly in the investment world. It is confused with the term volatility. My goodness, a very famous manager of HMC used it incorrectly for years and years and even that great business school HMS (second, of course, in greatness to the one in Philly) made the same error in a famous case study. Risk, in investments, is the possibility of impairment of an asset. The impairment can be permanent or temporary and depending on what instrument you hold, a loss can be total or partial. Right now, in my mind, among the most risky of assets are 10 and 30 year Treasury paper. You don’t have to worry about being paid off (no risk), but it might be in dollars that are worth much less because of inflation (big risk). I’ve covered this topic in the past and won’t bore you anymore.
Volatility in investments is something totally different. Some of us (very few) have spent our entire investment lives trying to use volatility and its consequences to our advantage. More explanation is for another time.
5. If Harvard would start to budget properly and set up the endowment distribution on a rational basis, it could in fact hold more illiquid investment that might provide a substantially higher long term return than other investments. This is predicated, however, on managing cash flow properly.
6. All of this might be taking a back seat to a more problematical macro situation. Here, in part, is what I wrote to a friend yesterday (who has close ties to Harvard and to the administration in Washington).
For what it’s worth:
“…there are only a few more days to meltdown unless the administration does something definitive.
One of those few more days was today, with the market going down another 3%.
The market doesn’t control everything, but it is vitally important from a psychological standpoint. A few more days like today (and the past two weeks) and the psychology of the American people will be irretrievably lost re confidence in President Obama. A loss of confidence will be a disaster because he will have to fight that much harder to get things done.
Larry’s stimulus package, as mentioned to you at the time it was passed, is a disaster because it concentrates on the consumer rather than on business. The administration’s plan for housing is a bust because it is too little. As I mentioned to Larry a month and a half ago, Marty Feldstein, among others, had a good plan for housing. Is Larry too proud to use other’s plans? It sure looks that way.
What to say about Tim Geithner. As we spoke about last week… two weeks tomorrow he got up at his press conference and said nothing. The market has rendered its report card… down 11% since he (didn’t) speak. Since then, he has said absolutely nothing about the banks, the third leg of the problem (economy and housing being the other two). Unless he says something in the next few days he will lose whatever credibility he has left, if he hasn’t lost it already. The easiest way to make a comeback is to suspend mark to market for regulatory purposes. If this is really not about cash flow, which he keeps insisting it isn’t and which I believe as well, then let the banks hold on to the toxic stuff in a side pocket (or many of the other ways that have been mentioned). As you know, I never ever thought I’d ever say that, but it is now, because of the past horrendous mistakes of the prior administration and the dithering of this administration, the only way out. It’s too late for many of the other good proposals that have been floated in the last two months and which have been ignored by this administration.
To the thought that there are really smart people in this administration and that they know what’s best, I would say that they are really smart, but they certainly don’t know enough of the real situation with the banks (yes, I’m talking about the Treasury Secretary and certainly Larry) and it would appear that they didn’t know about housing or the economy (it’s the jobs stupid!) either.
We might have a bounce in the markets because they are so oversold, but for it to be sustainable, something has to be done quickly. Simply hoping that things will get better is not the definition of a well thought out plan.
Very little time left my friend, before the President is looked at as another Herbert Hoover.” That would be terrible for all of us who thought he might have become one of the great American presidents.
2/24/2009 10:47 am
Thanks, Sam (I guess), very helpful, and good to get confirmation of the positive impression of JM. Best to my old student, R