Winning Harvard strategy in peril

CAMBRIDGE, Mass. — Harvard University officials talked with executive search firms last week about replacing Jack R. Meyer, the outgoing president and chief executive officer of Harvard Management Co., even as speculation swirled that Mr. Meyer's winning formula for managing the bulk of the university's $22.6 billion endowment fund in-house could be ditched.

In a Jan. 11 announcement, Harvard officials said Mr. Meyer and four colleagues would be leaving this summer to set up a private investment firm.

Industry observers cited perennial controversy over the multimillion-dollar packages Harvard pays its top-performing managers as the reason for the industry heavyweight's looming departure.

David Mittelman and Maurice Samuels — both of whom will be leaving with Mr. Meyer — earned $25 million apiece last year for logging outstanding bond market returns for the endowment, a sum that only looks modest when compared with the more than $34 million each took home the year before.

Although Mr. Meyer declined to be interviewed for this story, press reports have quoted him insisting that the compensation brouhaha wasn't central to his decision.

Even so, most observers see Mr. Meyer's looming exit as the end of his experiment to lure top money managers to a non-profit institution by offering competitive pay.

Harvard Management's performance-based compensation is "close to unique," and Mr. Meyer's departure suggests that, even at Harvard, political considerations finally took precedence over investment returns, said Alan Johnson, managing director and president of compensation consulting firm Johnson Associates Inc., New York.

Managing money internally is "a difficult model to sustain" for endowments answerable to such a wide range of constituents, said Larry Kochard, chief investment officer of Georgetown University, Washington. To find and keep superior portfolio managers, you "probably have to compensate them to the point that it becomes a real problem," he said. Georgetown's $730 endowment fund and $90 million pension fund are externally managed.

The question now is whether the loss of the veteran who brought Harvard to the cutting edge of money management will prompt the university to stop investing a significant chunk of its endowment in-house.

Harvard Treasurer James F. Rothenberg said the steering committee Harvard has set up to direct the search for Mr. Meyer's replacement will both reflect "on the distinctive investment model that has served Harvard so well" and consider "how best to position HMC for the future in a changing economic environment."

If Harvard were to turn away from internal management, it would be a final — if giant — step in a process that began roughly seven years before. That's when the first of at least five investment teams left Harvard Management to start private investment firms. In each case, HMC bought stakes in the spinoffs and entrusted endowment money to them.

Jonathon S. Jacobson, an absolute-return fund manager, left Harvard in 1998 to set up Highfields Capital Management, Boston, with an initial mandate of $500 million in Harvard endowment money. In July of that year, HMC's private equity and real estate group, led by Michael Eisenson, broke away to form Charlesbank Capital Partners LLC, Boston, with an initial infusion of $1.4 billion of Harvard endowment money and a commitment of another $550 million.

Timothy Peterson, who managed high-yield bonds, left to start Regiment Capital Management, Boston, in 1999. During the second half of 2001, a team of HMC veterans, led by equity portfolio managers Robert Atchinson and Phil Gross, set up Adage Capital Management, Boston, with an initial $1.8 billion infusion from Harvard. And last March, Jeffrey B. Larson, who managed foreign equity and emerging markets funds at HMC, left to start Sowood Capital Management, Boston, with an initial $700 million infusion from Harvard.

Those spinoffs have lowered the portion of Harvard's endowment managed internally to roughly 50% now from more than 85% at the end of 1997. And that figure could slump further if Harvard entrusts Mr. Meyer's yet-to-be-launched firm with some of the endowment money his team manages.

Mr. Rothenberg, in one press report, didn't rule out that possibility. The treasurer couldn't be reached for comment.

But much remains unclear. What would a move to "outsourcing" mean if the bulk of Harvard's endowment money continues to be managed by five or six firms that Mr. Meyer nurtured? While the arrangement has continued to yield superior results, the overlap of ownership stakes and investment mandates could create a system fraught with moral hazard, said one executive who declined to be named.

It's too early to conclude that Harvard will give up managing much of its own endowment funds. "In my experience, the university has been a huge supporter of HMC," and the model has pretty well been validated, said Sowood's Mr. Larson. The question is whether "the model can continue without Jack," he said.

For now, university spokesman Joe Wrinn would only say that Harvard is looking to replace Mr. Meyer.

Whether Mr. Meyer's decision will warn away other established talent from moving in isn't clear.

Mr. Meyer "has said it's uncomfortable being in his position politically," with each year's compensation announcement "restarting a whole chorus of criticisms" — testimony that may give would-be successors pause, noted John S. Griswold Jr., executive director of Wilton, Conn.-based Commonfund.