Harvard Management Co. President and CEO Stephen Blyth has mapped out a detailed investment plan for the company overseeing Harvard University's $37.6 billion endowment, aiming to improve long-term investment performance and revitalize lagging returns.
The result is a new approach deemed the flexible indeterminate factor-based asset allocation, incorporating elements from modern portfolio theory, factor-based investing, the reference portfolio approach and best-ideas investing.
Mr. Blyth and his team outlined the FIFAA approach in a four-step process: selecting appropriate factors; measuring asset class exposure to selected factors; choosing desired factor exposures; and determining asset class targets and ranges to match desired factor exposures.
The approach is referenced in a letter addressed to Harvard alumni and friends announcing the results for the fiscal year ended June 30. In the letter, Mr. Blyth outlined three investment objectives: to achieve a real return of 5% or more on a rolling 10-year annualized basis; to outperform appropriate benchmarks by 1 percentage point or more on a rolling five-year annualized basis; and to perform in the top quartile among the next 10 largest university endowments on a rolling five-year annualized basis. Harvard's is the nation's largest academic endowment.
“Our objectives are to be achieved while maintaining a portfolio whose risk profile is in line with the university's risk tolerance,” Mr. Blyth wrote. “Thus, in addition to these investment objectives, we have established an appropriate set of risk guidelines that provide suitable flexibility for a long-term endowment portfolio, yet maintain a prudent set of risk parameters within the portfolio.”
For the 12 months ended June 30, Harvard's endowment posted a return of 5.8%, surpassing the 3.9% return of the Cambridge, Mass.-based university's benchmark policy portfolio. It reported an average annual return of 10.5% for the five-year period, surpassing its benchmark return of 9.1%.
Mr. Blyth, previously HMC's managing director and head of public markets, assumed his new role Jan. 1 after then-CEO Jane Mendillo retired. Mr. Blyth did not respond to requests for an interview.