Tuesday, July 19, 2016

Let's Get Ready to Rumble: Harvard Management Co. vs. Yale Investments Office

Y'all ready for this?

From All About Alpha:

The Harvard Management Co.: Time for some creative destruction?
By Charles Skorina
It’s been 10 years now since Jack Meyer stepped down as head of Harvard Management Company, while David Swensen – now in his 31st year – has carried on at the Yale Investment Office
Each endowment has pursued its own distinctive management model: HMC with its “hybrid” internal/external approach, versus YIO’s exclusive reliance on cherry-picked external managers. 
We can now call the winner: It’s Yale.
And it’s time for HMC to undertake a major re-think of its business.
Six out of 13 members of the Harvard Corporation board are Harvard MBAs, and they understand what the stakes are.
President Drew Gilpin Faust has ex-officio seats on both the HMC board and the Harvard Corporation board (where the real power lies).  But the chair of the HMC board is Paul J. Finnegan, who also happens to serve on the Corporation board as Treasurer and chair of the finance committee.
Mr. Finnegan is co-CEO of Chicago-based private-equity firm Madison Dearborn Partners.  He has been deeply enmeshed in Harvard’s affairs for many years, is highly respected, and hasn’t obtained those positions by accident.
Currently, Harvard harvests about 4.3 percent of endowment AUM annually.  In 2015 that amounted to $1.6 billion. And that powered thirty-five percent of the school’s budget.  (Off the record, the endowment’s contribution is greater.)
Harvard has earned an annualized 7.6 percent over 10 years, versus Yale’s 10.0 percent.
It’s clear that an additional 2.4 percent annualized over ten years would have left Harvard with much more than a mere $37.6 billion endowment.  And that difference would have added hundreds of millions per year to their operating budget.
10-year Return as of 30 June 2015
10.0 %
7.6 %
7.2 %
Fortunately for Harvard, their development people are taking up some of the slack: in recent years their donations have been much larger than Yale’s.
Blackstone Group CEO Stephen Schwartzman gave a princely $150 million to Yale last year.  But in the same year John Paulson (despite the recent dry patch at Paulson & Co) gave Harvard a kingly $400 million for a new engineering school.  And that’s been representative of the trend.  This little table shows their respective fundraising for the past five years: 

Contributions in billions 2012-2015

5yr total
 5yr average


But even Harvard fundraising prowess hasn’t kept Yale from closing in.  In 2006 their endowment was only sixty percent as large as Harvard’s.  Today, it’s seventy percent as large.
Endowment growth AUM

Hybrid vs. Pure-bred:
The “endowment model” of fund management prescribes a highly diversified portfolio of investments across public and private markets, including significant reliance on the “illiquidity premium” in those private-market assets.  But how best to organize and manage the investment process is a question still open to debate.
The Harvard model has relied on a relatively large internal staff – 60 to 80 investment professionals and another 150 to 200 or so support personnel – to manage public-market equities and debt in-house; while using external managers and in-house staff to participate in private capital and real assets.  They call it a “hybrid model.”
The Yale investment office, by contrast, deploys a lean staff of roughly twenty investment professionals who invest with and oversee external managers.  They rely exclusively on those carefully curated outsiders to scour the world for the best opportunities.
Jack Meyer ran the Harvard’s endowment from 1990 to 2005, when he was forced out by some disgruntled alumni and professors over the Wall Street-sized paychecks he paid himself and his staff. 
Mr. Meyer built an internal full-service investment-management operation to compete with the best on Wall Street.  Whether it was the man, the market, luck, or just divine intervention, the endowment tallied an annualized 15.9% return in Mr. Meyer’s last 10 years, from 1995 to 2005.  And during his tenure, the endowment grew from $4.8 billion to $25.9 billion, thanks to a combination of alumni donations and endowment earnings.
But, relative to Yale, it has been mostly downhill for HMC since Mr. Meyer was driven off the campus....MORE
See also yesterday's:
"Where are the billionaire financial academics?"