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Editorial

Harvard offers a lesson

At Harvard Management Co., the time has come to clean house. Other asset owners, especially pension funds, foundations and endowments, should observe the changes at HMC and especially the results, for possible lessons for their own funds.

HMC's moves suggest even the best investment management structures should be reviewed regularly to ensure they have not become stale or outdated as the financial environment has changed.

HMC, which oversees Harvard University's $34.5 billion endowment fund, plans to cut its 230-member staff by half by the end of this year.

The restructuring includes a move to outsource the investment management of most of its assets, moving away from an internal management model. As part of the restructuring, HMC plans to shift to a team approach, in which all members take ownership of decision-making for the entire portfolio, from a specialist model.

The transformation was outlined in a letter by Nirmal P. “Narv” Narvekar, who became CEO effective Dec. 5.

Mr. Narvekar — esteemed in the endowment fund community for the outperformance produced when he was CEO at Columbia Investment Management Co., which oversees the $9 billion Columbia University endowment fund — was hired to turn around the recent lackluster investment performance of HMC and rebuild its investment management operations.

One lesson in HMC's effort is that strengthening executive leadership and investment operations is not simply a matter of finding the right person for the job. Governance includes re-examining the makeup of the board as MHC has done in the past two years.

That governance process means having in place policies, standards, lines of accountability and well-defined objectives that align interests to guide an asset owner in the recruitment of, and to guide executive management in structuring, a high-performing investment operation. Such a process must be well documented.

Trustees face frequent and recurring challenges including evaluating strategic and tactical allocation, hiring and firing external managers. A strong governance structure should have in place investment policies, asset allocations and implementation processes. Governance must include policies on benchmarks, liquidity, risk and performance objectives, and lines of accountability. It should include staff pay incentives that align with endowment interests.

A confidential McKinsey & Co. report called into question internal incentive compensation plans. Effective 2017, HMC redesigned its compensation plans.

Harvard appears to show that bigger is not necessarily better. Unlike many other asset owners, the Harvard endowment has yet to recover from the 2008 financial crisis. Its endowment fund is smaller today than the $36.9 billion it held as of June 30, 2008. In inflation-adjusted terms, the endowment value remains below the fiscal 2008 value by some $5 billion.

HMC has lacked stability in executive leadership — Mr. Narvekar is the eighth permanent or interim CEO since 2005 — and has been under pressure for lackluster performance and internal staff pay.

As with any asset owner, a stronger governance process would contribute to better, more stable executive leadership and investment operations.

At HMC, the results of the management changes driven by Mr. Narvekar will be reflected in the results over the next several years and will tell if the tune-up was sufficiently rigorous.

This article originally appeared in the February 6, 2017 print issue as, "Harvard offers a lesson".