Harvard endowment hones managers

Harvard Management Company will increase manager concentration levels, look closely at commodities and real estate, and bring more assets in-house where appropriate, as it moves into fiscal year 2011 with an unchanged long-term asset allocation.President and chief executive of the Harvard Management Company, Jane Mendillo, said risk allocations have been increased in areas where HMC had good long-term experience and competitive strength.

“Internal fixed-income trading and natural resources for example, we have been increasing risk allocations and encouraging our teams to do more when they see good opportunities. We are increasingly confident that we can develop an edge in real estate and commodities, taking a few pages from the books we’ve developed around timberland investing and internal trading,” she said.

In the September endowment report, she also said, HMC intends to continue to reduce uncalled capital commitments to real estate and private equity fund managers, with uncalled capital commitments at the end of fiscal year 2010 sitting at about $6.5 billion, down from over $11 billion two years ago.

Over a 20-year period, private equity has been the best performing asset class for HMC, with a return of 19 per cent, compared with the benchmark of 14 per cent.

While Mendillo said Harvard has benefited from early participation in the private equity arena, it had become crowded – with capital, managers and investors – in the past decade.

“Our expectations for this asset class are that returns will be more muted going forward, and we are even more committed to holding our fire for the best-in-class opportunities,” she said.

While Harvard will continue to have a “meaningful level of exposure”, it is anticipated the number of active relationships within private equity and venture capital portfolio will be reduced, and the concentration will be increased in the highest conviction managers.

Across the entire portfolio Harvard has been increasing its concentration levels with the number of relationships decreasing by about 20 per cent in the past couple of years.

“We focus on partnering with the best of the best and improving the terms under which we operate together, moving toward greater access to our capital and more reasonable fees,” she said.

Investment management of the $27.4 billion endowment is overseen by Stephen Blythe, head of internal management, and Andy Wilthsire, head of external management.

Mendillo said they have collaborated on several joint investigations this year, including an improved active commodities strategy, to be implemented in fiscal 2011.

Mendillo and the university have continue to defend the “endowment model” but have been working to enhance it, through further risk and liquidity management analysis, and a closer working relationship which aims to better align the endowment’s risk/return profile with the university’s goals and needs.

In the last fiscal year 2010, the HMC also engaged a consulting firm to assess its cost structure in managing the endowment, comparing it to a group of asset managers to identify areas of best practice and opportunities for improvement.

The study concluded that over the past five years, HMC’s total operating costs as a percentage of assets under management have averaged less than 0.3 per cent, including variable compensation.

“The study assessed that the HMC’s operating cost structure as significantly less than the cost of equivalent external or outsourced management.”

Mendillo says this has saved Harvard more than $1 billion in management fees over the past decade.

To the year ended June 30, the endowment portfolio earned an investment return of 11 per cent, 160 basis points above the policy portfolio benchmark.

Harvard endowment long-term policy portfolio

1995 2005 2010*
domestic equities 38% 15% 11%
foreign equities 15 10 11
emerging markets 5 5 11
private equities 12 13 13
Total equity 70 43 46
absolute return 0 12 16
commodities 6 13 14
real estate 7 10 9
total real assets 13 23 23
domestic bonds 15 11 4
foreign bonds 5 5 2
high yield 2 5 2
inflation-indexed bonds 0 6 5
total fixed income 22 27 13
cash -5 -5 2
total 100 100 100

*unchanged for fiscal 2011