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Facing Huge Challenges, One College Tries to Be Too Big to Fail
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Here is a lightly edited transcript of the conversation:
David Gura: Harvard University’s endowment fund is the stuff of legend.
It’s larger than the endowment of any other university on the planet, and larger, in fact, than the GDP of many countries.
Janet Lorin: As of June 2023, uh, the last time that they've given us a public value, it's 50.7 billion dollars.
Gura: But Janet Lorin, who covers higher education at Bloomberg, says this was not always the case.
It’s only in the last few decades that Harvard’s Endowment went from an approach that could be described as “kinda vanilla” — investing mostly in stocks and bonds, to something very different. Involving hedge funds and private equity.
That move made the Harvard Management Company, which oversees the endowment, an investing powerhouse.
In its heyday, it employed more than 200 people, and HMC still pays some staffers millions of dollars every year.
The growth of Harvard’s endowment is thanks, in large part, to the vision of one man: Jack Meyer, who oversaw it for more than a decade.
He embraced risk, and that paid off:
Lorin: They were extremely successful. They were the envy of the world
Gura: Meyer’s method quickly propelled the Harvard Management Company into financial superstardom. Universities and colleges studied its approach, and tried to emulate its success.
But in the meantime, Meyer’s method — as it evolved — was not without controversy. Scrutiny of compensation awarded to Meyer’s managers eventually led to his departure.
Now, Harvard’s endowment is at another crossroads. After years of lagging returns, many say Harvard’s pioneering fund has lost its edge to competitors.
Lorin: At the turn of the century, Harvard was double the size of Yale. And now, um, they're only 25% larger than Yale.
Gura: This is the Big Take from Bloomberg News, I’m David Gura.
Today on the show, the Harvard Management Company. It turns 50 this year. And celebrations may be kinda muted, despite its legendary status.
We look at the rise and the plateau-ing of what’s become the most famous endowment fund in the world.
How Jack Meyer blazed a new trail for the world’s universities and other nonprofits and why building on that success has proven to be so difficult for Harvard.
Gura: How did Harvard's endowment get as big as it is today? Um, I guess how long has it been around and when did it kind of have its most dramatic growth?
Lorin: So Harvard is the oldest and richest college in America. So they started getting donations, you know, hundreds of years ago. And you've heard of the principle of compounding interest? That has certainly helped them.
Gura: For years, the managers of Harvard’s endowment followed a pretty straightforward strategy, like other schools of its age and status:
Lorin: Most college endowments just invested in a traditional, you know, stocks and bonds portfolio.
But in the 1990s, when Jack Meyer took over the Harvard Management Company, the institution that oversees the endowment, and is separate from the university, he advocated for a much more diversified portfolio.
Lorin: Jack Meyer at Harvard pioneered the idea of more illiquid assets, private equity, hedge funds.
Gura: This way of thinking wasn’t necessarily new.
In the 1960s, the Ford Foundation – a philanthropy that has its own sizable endowment – published a report with this central idea:
That a university like Harvard, which has a time horizon hundreds of years long, can afford the risk of more volatile, illiquid investments, such as venture capital and private equity.
And Janet says Meyer saw the opportunity to make a change.
Lorin: He built sort of an in house hedge fund. It really is not an exaggeration to say Harvard literally built its own hedge fund.
Gura: Meyer’s ideas proved to be very lucrative. Under his leadership, Harvard’s endowment grew from $4.8 billion to $25.9 billion. By most measures, a stellar performance. That’s money that goes to University operations, like professor’s salaries and libraries, but also to graduate fellowships and scholarships.
They recruited portfolio managers from Wall Street – men and women who could’ve just as easily taken jobs at top hedge funds and private equity firms.
But for all his success, Jack Meyer’s strategy – and the compensation packages for his managers that came with it – started to draw scrutiny – especially from donors – from Harvard alumni.
Lorin: The pay was an issue for a long time. Jack Meyer paid for performance. And the performance was so spectacular, in one year, they paid a bond trader 35 million dollars.
Gura: Wow.
Lorin: And there was a whole group of alumni, the class of 69, very famously said, this is, you know, this is just not right for a nonprofit to be paying people so much money.
Gura: Eventually at Harvard, Jack Meyer left. He started his own firm. And others followed suit.
Harvard’s endowment started bleeding talent and turnover at the top became an issue.
Lorin: They had, you know, an interim for a bit and then they had Mohamed El-Erian, um, who had good returns when he was there, but he decided to go back to PIMCO, so he was there for less than two years.
And then, you know, they've, they've had several interims and then they had Jane Mondello. She was there for a longer tenure, but she had, was hit with the global financial crisis. Harvard had the worst return to the Ivy League schools, I think it was minus 27%, and they had to take a long time to recover.
Then she left, then somebody came in for less than two years, and then there was another interim, and now they have their current, uh, Um, chief executive officer, but that's a lot of people over a lot of time and, you know, when you have somebody coming in new, they switch strategies.
Gura: The constant change in leadership and strategy has left Harvard’s endowment in a bind – struggling to emulate the success it once had, and having to defend diminishing returns.
Janet says years of turmoil have taken their toll.
Lorin: So over the last 10 years, Harvard's annualized return is 8.2%, which, you know, sounds good, but when you look at the rest of their peers, funds over 5 billion, they're in the bottom 20%. That's not a place you would ever think of Harvard being. And for the last 20 years, a 20 year annualized return is they're in the bottom 40%. And what about Yale? Top 10%.
Gura: After the break, as Harvard was losing its edge, competitors – including one of its fiercest rivals — used strategies Harvard pioneered to make billions of their own.
Gura: While Harvard’s endowment is struggling to see the kind of returns it got in the past, Bloomberg’s Janet Lorin says other colleges and universities have also pursued aggressive investment strategies.
Gura: Is it alone at the top of the list of college and university endowments? Who's kind of nipping at its heels, if, if anyone?
Lorin: Well, the University of Texas. And I did a story, uh, that I really enjoyed a couple of years ago that looked at oil in the University of Texas. And why is the University of Texas so rich? And the answer is because they have 2.1 million acres in West Texas that the state designated for higher education in the 1800s.
And then in 1923, oil was discovered and now it's the Permian Basin and a couple of years ago they got 2 billion extra dollars just from the price of oil and production.
Gura: And it’s not just oil money coming for Harvard’s enviable gains. Also nipping at Harvard’s heels? The bulldogs. Yale. Harvard’s longtime rival. And that’s extremely unpalatable to many Harvard alums.
Janet says Yale also deserves credit for early innovations in endowment investing, thanks to David Swenson, who managed Yale’s endowment when Jack Meyer was running Harvard’s.
Lorin: Alongside Jack Meyer, there was a guy at Yale who took over the endowment in 1986. David Swensen, who is an economist. trained at Yale. Um, and he also pioneered this idea of illiquid assets, you know, the illiquidity premium. And he also did spectacularly well, but he had a very different model.
Yale’s endowment did very well under Swenson’s stewardship, and he managed to avoid the pushback Jack Meyer got, partly because Yale didn’t employ a large well-paid investment staff like Harvard.
And compared to Harvard, it’s been a lot more stable.
Lorin: Instead of hiring people to work for Yale, they found partners that - literally partners - who could work with them for, you know, 10, 12 longer years. They have had managers in their portfolio for a very long time. Managers love to have Yale’s money.
Gura: Janet says Brown, Princeton, MIT and others have seen record returns on their endowments, which have followed – to some extent – the same type of model as Yale, using outside managers.
And at the same time as the performance of Harvard’s endowment has been lagging many of its peers, the university has faced a lot of high profile problems. Its response to student protestors last October, following Hamas’ attack on Israel, and the resignation of the school’s president Claudine Gay.
Gura: Janet, can we talk about some of the pressure that Harvard has been under? I know that over the last year, there have been a number of alumni, very vocal alumni who have said that in light of the way the university responded to what happened on October 7th, um, they're going to withhold their donations. Is that something that's worrisome to the Harvard Management Company, to Harvard broadly, that you have these well heeled donors who are deciding not to give money anymore?
Lorin: Yes. Harvard has raised over a billion dollars, um, every year since I think 2014.
Gura: Every year?
Lorin: Every year. And they're very good at what they do and, you know, you think, well, maybe somebody from, you know, the class of 1980 is upset and decides to withhold, you know, their $500 donation forever. Okay, you're still getting, you know, millions from other people, but, you know, maybe that person has a lot of classmates who are doing the same thing.
Gura: Janet says even as returns have been declining, Harvard has been relying on its endowment more and more to fund operations.
Last year, Harvard spent more than $2 billion from investment earnings out of the fund, and that made up more than a third of Harvard’s operating budget for the year.
If that continues to happen, it risks diminishing Harvard’s endowment further.
But for all of its struggles, she points out, Harvard still has the largest endowment fund in the world, larger than the GDP of Morocco. So we probably don’t have to worry too much for The Crimson.
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