The future performance of Harvard's endowment is uncertain now that its management company's third president in 10 years has left.
After taking the job roughly a year and a half ago — Jan. 1, 2015 — Stephen Blyth resigned in late July as president and CEO of Harvard Management Co., the Boston-based company that manages the Cambridge, Mass., university's $37.6 billion endowment — the largest such fund in the U.S. He resigned while on a previously reported medical leave.
In the fall of 2015, Mr. Blyth presented a detailed investment plan for the endowment, aiming to improve long-term investment performance and revitalize lagging returns.
“The real question is: Now that Mr. Blyth is no longer there, how will this program be carried out and by whom?” asked William F. Jarvis, managing director and head of research at the Commonfund Institute in Wil-ton, Conn.
Mr. Blyth out-lined three investment objectives through the plan: 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.
But in May, it was announced that Mr. Blyth would take a temporary medical leave of absence due to an undisclosed condition. Robert Ettl, HMC's chief operating officer, was appointed interim CEO. Harvard announced Mr. Blyth's resignation on July 27.
“It has been a privilege to lead HMC, to work with such a talented team over the past decade, and to support an institution that makes a powerful impact in the world,” Mr. Blyth said in a news release announcing his resignation. “Harvard has played such a positive role in my life and, as I look forward to my next chapter, I am delighted to return to teaching and interacting with the students and faculty who remind all of us at HMC why the work that is done here is so important.”
Charles A. Skorina, founder of San Francisco-based executive search firm Charles A. Skorina & Co., which specializes in the hiring of chief investment officers, speculated on a few possible candidates to take the reins at HMC. The list includes Paula J. Volent, senior vice president for investments at Brunswick, Maine-based Bowdoin College, which oversees a $1.4 billion endowment; Seth Alexander, president of Massachusetts Institute of Technology Investment Management Co., which manages the Cambridge-based school's $12.4 billion endowment; and Andrew K. Golden, president of Princeton University Investment Co., which manages the New Jersey-based university's $22.7 billion endowment.
“There are probably 15 excellent CIOs that would be a great addition to Harvard,” Mr. Skorina said. “The problem is a lot of those seasoned CIOs are happy where they are.”
Despite Mr. Blyth's departure, it appears that HMC is ready to implement the investment strategy he announced last year. Paul J. Finnegan, chairman of the HMC board, said in the news release: “We are confident that under Bob Ettl's leadership, HMC will continue to successfully implement its investment strategy.”
Mr. Finnegan also thanked Mr. Blyth for his many contributions, including “a more flexible asset allocation framework.”
Neither Messrs. Blyth nor Finnegan were available for additional comment.
“If in fact the Harvard endowment does proceed along the lines of a more factor-based investing approach as outlined in Stephen Blyth's letter, it will not be out of line with the thinking of many fiduciaries who are overseeing large diversified portfolios,” Mr. Jarvis added.
Despite being the big man on campus, Harvard's endowment has been struggling with performance issues. Data from college and university reports show that although Harvard is still the largest university endowment, it ranked 12th out of 26 colleges and universities in terms of annual returns as of June 30, 2015, at 5.8% — below the average of 6.2%. Bowdoin ranked first, with an annual return of 14.4% as of June 30, 2015.
Harvard's 10-year annualized return for the year ended June 30, 2015 was 7.6%, ranking 14th out of 23 colleges and universities and below the average of 8%. Bowdoin and MIT tied for first place, with a 10-year return of 10.5%
Mr. Skorina said some industry observers are speculating that the HMC board is looking to move away from the business model that former President Jack Meyer established when he ran the endowment from 1990 to 2005, which was that of “an internal full-service investment management operation to compete with the best on Wall Street.”
“My judgment is that model under (Jack) Meyers worked for a certain period for a certain group of guys,” Mr. Skorina added. “(Paul) Finnegan's a real smart guy. My guess is it's become pretty clear to the board that the Meyer model doesn't work. The board is moving quickly to reshape the HMC.”
While most modern endowments have a small staff and invest via outside money managers, Harvard has been using what Mr. Skorina describes as a “hybrid model,” in which HMC relies on a large internal staff to manage public-market equities and debt, while using external managers and in-house staff to participate in private capital and real assets. He surmised that the board is looking to move away from that approach and hire more outside managers.
Mr. Skorina cited the recent cuts that have taken place at HMC, including the June departures of managing directors Michael Ryan, head of public markets and absolute-return strategies, and Robert Howard, equity long/short portfolio manager, as a sign that the board wants to assert more control over the company.
“These guys on the board are smart,” he said. “I think they've had enough.” n