Roughly halfway into its five-year-long restructuring process, Harvard Management Company’s chief executive officer said he’s “not pleased” with the endowment’s 6.5 percent return.
HMC’s chief investment officer, N.P. Narv Narvekar said in his fiscal year 2019 letter, which was published online this week, that while the $40.9 billion endowment’s performance wasn’t up to snuff, it is undergoing a significant restructuring, which takes time.
According to Narvekar, the endowment’s allocations to venture capital, private equity, and natural resources were major sources of concern over the past year.
Narvekar took the helm at Harvard’s endowment in December 2016. Soon after, he launched the restructuring, which involved dismantling the firm’s hybrid model of managing assets internally and externally.
And this year’s 6.5 percent return actually beat a preliminary peer median by one percentage point, a private return database of about 100 endowments and foundations accessed by Institutional Investor showed.
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One of Narvekar’s major sources of concern is the endowment’s allocation to natural resources. Since he began there, HMC has reduced its exposure to the asset class from nine percent to four percent, according to Narvekar’s letter.
But, he noted, the endowment was “forced” to write down or write off roughly $1 billion of what he called “deeply troubled assets” in the natural resources class. HMC is still working to sell off some of those assets, which is why, according to the letter, natural resources had a negative seven percent return for the fiscal year 2019.
Narvekar also expressed concern in his letter over private equity’s J-curve, which shows that asset valuations tend to dip before generating returns, much like the shape of the letter J.
“For now, and for the next few years, we will suffer the impact of the private equity ‘J-curve’ — the natural progression of a fund’s value in this space, where short-term losses precede long-term gains,” Narvekar wrote in a section titled, “A Sobering Thought.” “Many peers dealt with these growing pains years, if not decades, ago.”
A spokesperson for HMC added via email Friday that increasing an allocation to private equity typically has a short-term effect of muting returns for the asset class. When HMC considered its private equity portfolio early in the restructuring process, it expected to take seven to nine years to reach a meaningfully higher allocation, Narvekar said in his letter.
Furthermore, “Harvard’s exposure to venture capital is notably small in the context of leading endowments,” he wrote. VC was one of the fiscal year’s best-performing sectors.
He added that the endowment is early in the process of transitioning to a portfolio with larger allocations not only to venture capital but also to buyout and growth investment strategies.