Kaingaroa Forest, New Zealand—see right
With the arrival of Jack Meyer, the Harvard Management
Company began its move into investment exotica, a sharp
break with the more conservative approach that had
dominated since its inception in 1974.
Financial District, Boston—p. 34 CLICK HeRe >
As HMC managers excelled, many, seeing grander
opportunities elsewhere, started to leave. Their association
with the university was not over, however: Meyer, intent on
outsourcing the endowment’s management, started seeding
HMC alums’ funds on a massive scale.
Kremlin on the Charles—p. 35 CLICK HeRe >
With HMC managers hauling in large bonuses, wails
of indignation were heard from Harvard, where even
President Larry Summers refused to publicly defend HMC’s
compensation system. The result: Meyer and his best
managers decamp en masse.
Newport Beach, California—p. 36 CLICK HeRe >
The arrival and decidedly odd tenure of Mohammed el-erian,
who lasted less than two years as Meyer’s successor.
Back Bay, Boston—p. 37 CLICK HeRe >
An indication of trouble brewing at HMC was seen with the
seeding and eventual collapse of HMC alum Jeffrey Larsen’s
Sowood Capital, a hedge fund housed in 500 Boylston
Street—a building, ironically enough, built on pillars of sand.
Wellesley, Massachusetts—p. 38 CLICK HeRe >
As the world markets verge on collapse, Jane Mendillo—
manager of the Wellesley endowment—is chosen to lead
HMC. Little did she know that, nine months on, Harvard would
be down as much as 25% and facing a complete overhaul of
its investment paradigm.
Death & Taxes—p. 35 CLICK HeRe >
At a point when endowments are losing money across the
board, multiple levels of government are considering moves
that actually would compound the problem: taxation.
Kaingaroa Forest, New Zealand
A Radiata pine takes three decades to reach its harvesting height of
30 meters, its bright green branches, small and straight, competing
for sunlight with its closely bunched neighbors. Grown almost
exclusively on plantations, the Radiata is quick to sprout and
versatile in use, which makes for an enticing investment. The largest
such plantation south of the equator is the Kaingaroa Forest, on the
North Island of New Zealand. The majority owner of this forest is the
Harvard Management Company.
A forest in the South Pacific might seem like an odd investment
for America’s oldest university, yet this timber symbolizes what the
Harvard endowment has become: one of the most sophisticated
and diversified portfolios in the world. Fixed-income and equities
are the traditional bastions of endowment investing, yet it is among
the fissured bark and needle-covered ground of this foreign forest
that the recent history of HMC can be told. It is here, among these
towering pines, that we can begin to see how the shift into such
alternative investments may have caused the endowment to, like
Sinatra, catch a cold in today’s turbulent economic climate.
By the end of the third quarter of 2008, it was evident that the Harvard
endowment was in trouble. An autumn letter to alumni from President
Drew Faust confirmed that HMC had lost 22% since July 1, 2008—an
$8 billion hit for the endowment. HMC now is unloading private equity
holdings, while the university is commencing a large bond offering,
both indications of a dearth of cash. What is not so obvious, however,
is why Harvard—both a microcosm of the institutional investment
world as a whole and a leader that others look to for implicit advice—
found itself so exposed to begin with.
The endowment itself started as a book drive. Named after the
clergyman who in 1638 donated his entire library to the fledgling
college, Harvard, over hundreds of years, amassed vast wealth.
The endowment was substantial enough by 1974 that the university
decided to create its own wholly owned investment arm, the
Harvard Management Company, which was nurtured for its first 16
years by Walter Cabot, a scion of Boston society. Only in his waning
years did Cabot begin to move away from bog-standard stocks and
bonds into more esoteric investments. When he left in 1990, his
baby stood at more than $5 billion.
In strode Jack Meyer. Arriving via Harvard Business School and the
Rockefeller Foundation, Meyer was no Boston Brahmin. Sporting
a thick, brown mustache and a penchant for delving deeply into
his investments—as an example, he had professional lumberjacks
on staff who would help him choose and manage forests such as
the Kaingaroa—Meyer made it clear that he would go anywhere
and invest in anything to create return for Harvard. He quickly
created the Policy Portfolio, which set out what percentage of the
endowment would be in each asset class and acted as HMC’s
internal benchmark, and he expanded investments to include faraway
forests, massive real estate holdings, and other investment exotica.
Over the course of his 15-year tenure at Harvard, Meyer added $12.2
billion over and above what the average large institutional investor
would have achieved, and the fund stood at $22.6 billion. When
Meyer decamped in 2005, Yale—Harvard’s rival and possessor of the
second largest university fund on earth—had a total endowment of
$13 billion, almost exactly the equal of what Meyer had added.
One of the many who hail Meyer’s skill, and one of his few HMC
colleagues who will talk on the record about it, is David Scudder, the
vice president of Trusts for HMC from 1998 to 2005. Hired by Meyer
after decades at the Wellington Management Company, Scudder has
nothing but praise for his old boss. “Jack Meyer was one of the most
gifted and original strategic thinkers in asset management,” he says.
“There is no doubt that he did a brilliant job for Harvard.”
Certainly, on Meyer’s watch, Harvard thrived. However, within his
accelerated diversification strategy there lurked a virus: a potential