HMC to increase in-house management

Harvard Management Company, with responsibility for managing the $26 billion Harvard endowment fund, has hired a number of senior investment staff and reorganised its internal
structure as it positions itself to bring more asset management in-house.

The internal team currently manages about one third of the assets, but chief executive Jane Mendillo, said we are looking to increase the share of our internally managed assets under the right conditions”.

Some of the internal teams proved to be the performance differential for the endowment in the fiscal year 2009, with the international fixed income team outperforming its benchmark by more than 900 basis points.

Mendillo said active management proved essential throughout the challenging period of 2008/09, with its internal emerging markets team also outperforming, by 370 basis points, while the overall portfolio was buffered by positive returns in trades employed as top-down portfolio hedges.

This year the internal investment teams were aggregated under two investment heads; Stephen Blyth as head of internal management; and Andy Wiltshire as head of external management.

Blyth oversees the investment strategies and portfolios of the public equity, fixed income and foreign currency specialists; while Wiltshire manages the groups making investments using outside managers or partners in areas such as private equity, real estate, natural resources and marketable securities.

In more recent months HMC has added five additional portfolio managers including Michele Toscani in fixed
income/Asian markets; Emil Dabora and Mark McKenna in equity arbitrage; Dan Cummings in real estate and John Barker in externally managed funds.

In addition the endowment is endeavouring to facilitate better internal investment structures, with the policy portfolio re-engineered to include fewer distinctions among the finely tuned asset classes to encourage greater collaboration among teams in exploring investment themes.

In addition to the newly created positions of head of internal management and head of external management, HMC also appointed a chief operating officer, Bob Ettl, who has redesigned and upgraded the investment support. He also appointed a new CFO, Kevin Shannon, and a new chief technology officer, Michael Maffattone.

The endowment’s 2009 financial year return of -27 per cent was foiled by liquidity, but spurred by active management, in particular its internal fixed income team, with Mendillo outlining a number of portfolio changes for the next fiscal year including a doubling in its emerging markets exposure.

She released the portfolio performance and analysis in the first Harvard Management Company Endowment
Report this month, with notable changes to the asset allocation including an increase in emerging markets to 11 per cent; a decrease in domestic equities to 11 per cent; and an increase in absolute return strategies to 16 per cent of
the now $26 billion portfolio.

For 2010 the private equity allocation remains steady at 13 per cent, with the asset class returning -32 per cent of the year to June 2009. Over the past 10 years it has added 15.5 per cent per year.

The worst performer was the real estate portfolio which lost more than 50 per cent during the year.

Mendillo acknowledged the challenging year for the endowment, in particular its aggressive commitment to illiquid assets, and in response has rebalanced the portfolio to undervalued assets. It has decreased its uncalled capital commitments by about $3 billion.

She said with hindsight the endowment would have started the year in a more liquid position with less exposure to
some of the alternative asset categories. However she said it was committed to its long-term investment strategy of diversification.

Harvard’s annualised return fort the last five year fiscal years is 6.2 per cent.