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January 12, 2015 12:00 AM

Harvard's Blyth seen likely to take slow, steady course

New CEO's background in public markets may shape portfolio's path

James Comtois
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    Stephen Blyth is a Harvard professor and an alumnus who was in charge of public equity markets for the endowment before taking on the top job.

    With Stephen Blyth now officially in place as Harvard Management Co.'s president and CEO, observers are wondering how management of the Cambridge, Mass.-based university's $36.4 billion endowment will differ from his predecessor, Jane Mendillo.

    In particular, sources are curious about what he'll do with the proceeds gained from the endowment's underperforming private equity investments and what he'll do — if anything — to improve the endowment's lackluster returns.

    Sources with whom Pensions & Investments spoke agreed it made sense for Harvard's board to select someone internally, primarily to ensure a smooth transition and to put someone in place who already knows the ins and outs of the company and university. Not only is Mr. Blyth an executive at HMC, he's also a professor at the school and, according to his HMC biography, an alumnus who earned his doctorate in statistics at Harvard.

    Prior to his promotion, Mr. Blyth was managing roughly 40% of the endowment's overall portfolio and making more money than his then-boss. Data from Bloomberg LP show that in 2012, Mr. Blyth made $5.35 million, more than the $4.8 million in compensation Ms. Mendillo earned in the same period.

    Charles A. Skorina, founder of San Francisco-based executive search firm Charles A. Skorina & Co., which specializes in the hiring of chief investment officers, said that hiring Mr. Blyth for the job is “logical,” since he's already there, “has connections to the faculty through his teaching post and was heading the area that did OK. It's a smooth transition, much smoother than if you brought someone in from outside.”

    William F. Jarvis, managing director and head of research at the Commonfund Institute in Wilton, Conn., agreed. “He doesn't need a settling-in period that a new person would need. It's a big, big ship.”

    Commonfund is a manager of managers whose clients primarily are endowments.

    Ms. Mendillo, who retired at the end of 2014, wrote in HMC's fiscal-year 2014 report in September that private equity “is one of the areas where large pre-crisis commitments and investments have continued to undercut” performance. Still, the report suggested more hedge fund and private equity investing are on the horizon for HMC.

    Ms. Mendillo, in the report, added that, for HMC's largest commitment years, “vintage years 2004 to 2008, comprising 73% of the current portfolio ... (the) funds are substantially underperforming.”

    Mr. Jarvis said in a telephone interview that “those assets” Ms. Mendillo referred to “are about to run off.”

    This, he says, raises the question: “What will be done with the proceeds?”

    “Will they be redeployed in other asset classes that we might not recognize?” Mr. Jarvis asked, adding: “Harvard's been a pioneer in identifying strategies that others haven't recognized and being a first mover. Among those could be infrastructure, farmland or natural resources. Or it could be something we haven't thought about yet.”

    Mr. Skorina speculated that, over the course of the next few years, Mr. Blyth will focus more on public markets; he was head of the public markets at HMC before being promoted to CEO.

    “He'll probably have a bias toward large public liquid markets. That's what he's been running and where he's had success,” Mr. Skorina said. “So I think over the next five years Mr. Blyth will cut back on private equity and hedge funds and go with what he knows — public markets.”

    Mr. Skorina also pointed out that Mr. Blyth, who wrote a book recently on quantitative finance, is “very much a quant.”

    Although Mr. Blyth declined to comment for this story, he said in a news release announcing his promotion that he is inheriting “an organization that is in great shape.”

    Lowest among peers

    When Ms. Mendillo announced her decision to retire in June, Harvard University's endowment had posted an annualized return of 1.7% for the five years ended June 30, 2013, the lowest among its Ivy League peers. By comparison, foundations and endowments in the Wilshire Trust Universe Comparison Service had a median 4.6% annualized return for the period.

    After 2008's performance fell out of the review period, the five-year annualized performance vastly improved. It posted an annualized return of 11.6% for the five years ended June 30, 2014, slightly below Wilshire's median annualized return of 11.71% for all foundations and endowments for the period.

    Erik Gordon, a professor at the University of Michigan's Ross School of Business, Ann Arbor, said he believes it unlikely that Mr. Blyth will do much to bring the endowment into the top quartile.

    “He's not a particularly bold guy. His area is public markets, the sleepy part of endowments,” Mr. Gordon said. “He doesn't show any competitive spark. He seems content with just outperforming the internal benchmark, but not concerned with being the top (competitive) performer.”

    This, Mr. Gordon believes, is fine with Harvard's board.

    “I don't think they want changes. HMC tracked really strong endowment managers (in its search) and picked a guy who's been there through all the underperformance and said, "I feel good about the performance over the long run.' They didn't pick a man who said, "I've got a plan to make us a top-tier performer,' ” he said.

    This, he thinks, is most likely because for Harvard, steady performance is more attractive than top performance.

    One executive at a recruiting firm who asked not to be named, however, said she believes “changes will definitely be made” with how HMC manages the endowment to counter its “mediocre” performance.

    “He will most certainly not continue with the status quo,” she added.

    Related Articles
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