The about-face is the latest in a long series of setbacks for Harvard Management, now on its sixth CEO since 2005, while struggling to generate the returns needed to sustain the university’s formidable academic and research budget. In terms of investment returns, Yale University, whose endowment is smaller, left Harvard in the dust years ago. Indeed, Harvard has lagged behind most of the eight-member Ivy League since 2011. Only Cornell University has done worse.
The new shift to rely more on external money managers represents a reversal of longtime Harvard policy of using in-house staff. “I’m really surprised they would dismantle it that quickly,” Verne Sedlacek, former chief financial officer of HMC, said of the equity team. “That’s not a good sign for what the strategy is.”
The developments shocked HMC employees. Blyth had told staff last year that new investment strategies take years to be evaluated, according to people close to the endowment. Harvard Management had also approved hiring researchers to support the group this year, the people said.
For years, Harvard Management has struggled to recapture its former glory under Jack Meyer, who successfully -- and controversially -- transformed the endowment into an elite money manager in the 1990s.
Meyer, who ran HMC from 1990 to 2005, pioneered a strategy of expanding into new asset classes such as private equity and timberland. And rather than hire outside managers, as most other universities do, he developed an internal staff that traded like a hedge fund in bond and stock markets -- earning hedge fund-like compensation. In his last decade there, he presided over average annual returns of nearly 16 percent, among the best in the business.
News that HMC was paying some staff millions of dollars annually -- some paychecks reached as high as $36 million -- set off an outcry across campus. Some alumni called the rewards excessive. Meyer left and opened his own hedge fund as did many others on his team.
After a nearly year-long search, Mohamed El-Erian, of Pimco fame, succeeded Meyer. He turned to outside managers because of the mass exodus of internal talent. But despite guiding the endowment to a one-year return of 23 percent in 2007, El-Erian quickly headed back to Pimco. Then his successor, Jane Mendillo, was upended by the financial crisis, presiding over the 27 percent loss in 2009 -- the worst in HMC’s history.
Scaled Back
The collapse squeezed Harvard hard. The university scaled back a campus expansion championed by Lawrence Summers, previously the university’s president. Perks like hot breakfasts in most dorms, free sweat suits for athletes and cookies in faculty meetings were suspended.
Blyth joined HMC in 2006 as head of international fixed income trading from Deutsche Bank. He took over as CEO in 2015 promising better returns. He saw an opportunity to keep shifting more assets from outside managers to an internal trading desk that as of last year oversaw about $9 billion of assets.