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June 23, 2014 01:00 AM

Harvard's sluggish performance counters Mendillo's optimism

James Comtois
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    Stephanie Mitchell/Harvard University
    Jane Mendillo said Harvard's endowment portfolio is in 'excellent shape.'

    Jane Mendillo's decision to step down as president and CEO of Harvard Management Co. comes almost a year after Harvard University's endowment reported the lowest five-year annualized return among its Ivy League peers.

    But the leader of the Boston-based company told Pensions & Investments in a telephone interview she's leaving the university's $32.7 billion portfolio in “excellent shape.”

    “We've positioned the portfolio and rebuilt the team, and I wanted to choose a moment to leave the firm when we were seeing upward momentum,” Ms. Mendillo added.

    Harvard University's endowment faced some rocky years during Ms. Mendillo's tenure. For the five years ended June 30, 2013, the endowment posted an annualized return of 1.7%, according to data compiled by Charles A. Skorina, the founder of San Francisco-based executive search firm Charles A. Skorina & Co., which specializes in hiring chief investment officers. By comparison, foundations and endowments in the Wilshire Trust Universe Comparison Service had a median 4.6% annualized return for the period. Columbia University's $8.2 billion endowment, New York, posted the highest five-year annualized return among the Ivy Leagues, at 6.8%, Mr. Skorina said.

    Although the Harvard endowment — the largest university endowment in the U.S. — posted a lackluster annualized five-year return for the period ended June 30, 2013, spokesman Lex Suvanto told P&I the management company is forecasting a five-year arithmetic average of 11% to 12% for the endowment for the period ending June 30, 2014. HMC is not projecting a compound annualized return.

    HMC reported an endowment return of 11.3% for its fiscal year ended June 30, 2013. This is slightly below the 11.7% average posted by 835 U.S. colleges and universities during the same period, according to the NACUBO-Commonfund Study of Endowments.

    At the end of its 2012 fiscal year, the endowment posted a -0.1% return. Data from the NACUBO-Commonfund study showed U.S. educational endowments returned an average of -0.3% net of fees for that year.

    Mr. Skorina said Harvard's endowment isn't bad, just “mediocre,” but university officials should expect more from the management company that oversees the portfolio.

    “Harvard pays the highest (in compensation) of any endowment or foundation in the country. For that money, I think it's fair for the board and alumni to expect consistent top-quartile performance,” Mr. Skorina added. “And they're not getting it.”

    Ms. Mendillo is one of three executives who left the company this month. Mark McKenna left his position as a managing director at HMC, where he ran an event-driven strategy, to join BlackRock Inc., New York, according to an internal memo BlackRock provided to P&I June 11. On June 17, Apoorva K. Koticha left as a managing director in international fixed income, said someone familiar with the matter who asked not to be identified.

    HMC spokesmen declined to comment on Messrs. McKenna and Koticha.

    Ms. Mendillo took control of HMC and the endowment on July 1, 2008, just 2½ months before Lehman Brothers Holdings Inc. filed for bankruptcy. Her predecessor, Mohamed El-Erian, left in September 2007 to return to Newport Beach, Calif.-based Pacific Investment Management Co. LLC, taking on the roles of CEO and co-chief investment officer.

    When Ms. Mendillo joined HMC, the endowment was valued at $34.9 billion. Due to the impact of the global financial crisis, the portfolio dropped to $26 billion at the end of its 2009 fiscal year.

    Now, at $32.7 billion — not quite where it was when Ms. Mendillo took over — it's still nearly 26% above its 2009 nadir.

    Despite its low five-year return, it's far from all bad news for the Ivy League university's endowment. The return for Harvard's endowment for the 10 years ended June 30, 2013, was an annualized 9.4%, compared with its internal benchmark of 7.2%. Its 20-year return was an annualized 12%, compared with its benchmark of 9.1%.

    “She took over a big job during a difficult time, and she did a great job in the face of very difficult markets, so Harvard's better off for having her in that role,” said Andrew K. Golden, president of Princeton University Investment Co., which manages the New Jersey-based university's $18.2 billion endowment.

    Princeton's endowment posted an 11.7% investment return for the fiscal year ended June 30, 2013, and an annualized five-year return of 4.26%.

    William F. Jarvis, managing director and head of research at the Commonfund Institute in Wilton, Conn., pointed out that in 2013, less-diversified portfolios wound up faring better than more-diversified portfolios, though the better-diversified portfolios like Harvard's have performed well for the 10-year period.

    “With the Fed's impending taper and as risk begins to assume a more normal relationship with return, diversification may help,” he said.

    Mr. Jarvis added that it's still too early to tell whether the better-diversified portfolio model that Harvard adopted will fare well in the future. He also noted HMC is managed differently from the other top endowment management firms.

    HMC doesn't run like a traditional endowment, Mr. Jarvis said. “At HMC, they buy and sell securities, which is different than what all other endowments do. Hidden inside (Harvard's) portfolio are things that may not be working well now, but may work better down the road.”

    Once the company's fiscal year ends June 30, it will be clearer how Harvard's portfolio is performing — and performing in relation to its peers. But with the upcoming five-year return shaking off the impact of the global financial crisis, it is possible the five-year annualized 2014 return will improve.

    “I'm optimistic about HMC and the Harvard portfolio,” Ms. Mendillo said.

    Ms. Mendillo will continue to preside over HMC and the university's endowment until the end of the year. The university's board is seeking a replacement; Ms. Mendillo said she is not a part of that process.

    Beginning Jan. 1, 2015, Ms. Mendillo said she plans to pursue other interests, such as music and education. n

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