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Harvard Moves to Outsource Management of Most of Its Endowment

After years of turmoil at the top, Harvard is reversing its long-standing commitment to managing most of its endowment money in house. The management company will lay off up to half its investment staff and spin out its real estate business.

  • Imogen Rose-Smith

Heads up asset managers — one of the world’s most prestigious universities is now looking for outside firms to invest much of its $35.7 billion endowment.
 
Harvard University’s Harvard Management Co. will shut down its internal hedge fund by the middle of 2017 and plans to lay off half the endowment’s staff and spin out its internal real estate team, according to a Wall Street Journal report citing people familiar with the matter. The endowment’s natural resources portfolio and its passive exchange-traded funds will continue to be managed in-house. CEO N.P. (Narv) Narvekar has proposed sweeping changes to the endowment, according to the report, though sources tell Institutional Investor the outsourcing plan was “clearly on the table” as Narvekar prepared to join the endowment.

Uniquely among U.S. endowments, Harvard has long operated a hybrid investment model, whereby a significant portion of its assets, including a large hedge fund operation, were invested in-house via the HMC rather than by outside managers. While initially successful, the approach also drew scrutiny — firstly for how much in-house investment staff were paid and then, more recently, for underperformance. Harvard lost $2 billion in endowment value in what interim CEO Robert Ettl called a “disappointing” 2016, posting its lowest returns since the financial crisis. The endowment lost 2 percent for fiscal the year ending June 30 and failed to beat its internal benchmark. Its five-year annualized return clocked in at 5.9 percent, above the 5.4 percent for the benchmark portfolio but well below the 8.9 percent that a U.S. 60 percent equities/40 percent bond fund would have delivered.

Narvekar, 54, was hired in October to lead HMC. He joined from Columbia University, where he had been CEO since 2002. Harvard hopes that the hiring of the low-profile Narvekar will end a tumultuous period in which the university cycled through four CIO’s since the departure of Jack Meyer in 2005. Most recently, Stephen Blyth left the post after less than two years on the job. To help implement his new strategy, Narvekar — who pursued a similar approach at Columbia’s $9.6 billion endowment — has hired Richard Slocum, who had been investing the personal assets of New York Jets owner Woody Johnson, as CIO. Slocum will join in March, according to the WSJ.

When the endowment was looking for a new CIO last year, the HMC board made clear that one of the factors up for consideration was whether to stick with the hybrid model or go with a more traditional outsourcing approach.