Harvard Investment Managers Got Fat on Slow Rabbits while Large Endowment Funds Lose Overall

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By Wallacetripp Wallace Tripp (Own work) [CC BY-SA 3.0 or GFDL], via Wikimedia Commons

October 17, 2016; Pensions & Investments

Does high compensation always attract the best talent with the greatest motivation? Maybe not. For the first time in seven years, large U.S. endowments in aggregate produced a negative return after enduring a difficult fiscal year, according to Pensions & Investments. More than 80 percent of the 31 funds tracked by P&I for its regular fall story on endowments found themselves in a negative position as of June 30th, the end of the fiscal year for many colleges and universities in this country.

Only six of the thirty-one showed positive returns, with Yale seeing a return of 3.4 percent on its $25.4 billion endowment, down to a identical low of -3.4 percent for the Ohio State University endowment ($3.6 billion) and the University of California ($9.1 billion). This is a precipitous decline from the prior fiscal year, when returns of the 28 institutions measured ranged from 14.4 percent to 1.6 percent. The average return this year was -1 percent, compared with 6.2 percent for the prior year.

The six institutions with positive returns were Yale University, University of Oregon, Syracuse University, University of Minnesota Foundation, Mass. Institute of Technology, and Princeton, with a less than 1% return.

The extraordinarily well compensated investment folk at Harvard University’s Harvard Management Company, managing the largest endowment in the country, saw negative returns of -2.0 percent and found itself 23rd on the list of 31 institutions. Michael McDonald of Bloomberg News writes that a recent McKinsey report judged the Harvard Management Company’s performance over the five years ending in 2014 as “fat, lazy, and stupid.” The report found that the operation allowed the high-level staff to negotiate the benchmarks, setting them too low while compensation of investment managers was overly high. The benchmarks were termed “slow rabbits” that posed little challenge.

In the five years scrutinized by McKinsey, the fund reported an average annual return of 11.2 percent, compared with Princeton’s 14 percent, Yale’s 13.5 percent and MIT’s 13.2 percent. Harvard’s relative underperformance cost the school $3.5 billion. Because of such results, McKinsey warned that Harvard could lose its perch as the world’s largest endowment to Yale within 20 years. On a 10-year basis, Harvard’s performance was “slightly better,” McKinsey said.

Over the five years studied, Harvard Management Company paid its then-CEO Mendillo $37 million, which is twice David Swensen’s compensation at Yale University.—Ruth McCambridge