Key Takeaways
- • Harvard University's endowment is outsourcing management of most of its $35.7 billion in assets, dismantling a unique hybrid in-house investment model that had defined the institution for decades.
- • Harvard Management Co. will shut down its internal hedge fund by mid-2017 and reduce staff by approximately 50 percent, while retaining in-house management only for natural resources and passive exchange-traded funds.
- • New CEO N.P. (Narv) Narvekar, hired in October 2016 from Columbia University, is driving a sweeping strategic overhaul following years of underperformance and organizational turmoil at the top of the endowment.
- • Harvard's endowment posted a loss of $2 billion in fiscal 2016, delivering negative 2 percent returns and failing to beat its internal benchmark; the five-year annualized return of 5.9 percent significantly trailed a comparable 60/40 equity-bond portfolio at 8.9 percent.
- • The outsourcing shift marks a reversal of Harvard's long-standing commitment to managing endowment assets internally, a model that had drawn criticism for both high in-house compensation and recent investment underperformance.
Summary
Harvard University is fundamentally restructuring its endowment management operations, shifting from an in-house investment model to outsourcing most of its $35.7 billion in assets to external managers. CEO N.P. Narvekar, who joined Harvard Management Co. in October 2016 from Columbia University where he served as CEO since 2002, has proposed and begun executing sweeping organizational changes designed to address years of underperformance and operational challenges.
The restructuring involves shutting down Harvard's internal hedge fund by mid-2017 and laying off approximately half of the endowment's staff. The university will retain in-house management only for its natural resources portfolio and passive exchange-traded funds. The internal real estate team will be spun out, further reducing the scope of in-house investment operations. This transformation represents a dramatic departure from Harvard's historical hybrid model, which uniquely among U.S. endowments had maintained substantial assets under direct internal management rather than delegating to outside firms.
The strategic shift comes in response to significant underperformance. Harvard's endowment lost $2 billion in value during fiscal 2016, with the endowment posting negative 2 percent returns for the year ending June 30 and failing to exceed its internal benchmark. The five-year annualized return of 5.9 percent, while marginally exceeding the 5.4 percent benchmark return, lagged substantially behind what a traditional 60 percent equities/40 percent bonds portfolio would have delivered at 8.9 percent. The fiscal 2016 results were described by interim CEO Robert Ettl as "disappointing" and represented the endowment's lowest returns since the financial crisis.
Beyond performance issues, Harvard's in-house investment model had faced sustained criticism regarding compensation levels for internal staff and, more recently, persistent underperformance relative to passive benchmarks and alternative strategies. The outsourcing plan, sources indicate, was clearly part of Narvekar's mandate as he took the helm of the endowment, suggesting the board expected comprehensive restructuring to address these structural challenges and restore competitive returns.
The restructuring involves shutting down Harvard's internal hedge fund by mid-2017 and laying off approximately half of the endowment's staff. The university will retain in-house management only for its natural resources portfolio and passive exchange-traded funds. The internal real estate team will be spun out, further reducing the scope of in-house investment operations. This transformation represents a dramatic departure from Harvard's historical hybrid model, which uniquely among U.S. endowments had maintained substantial assets under direct internal management rather than delegating to outside firms.
The strategic shift comes in response to significant underperformance. Harvard's endowment lost $2 billion in value during fiscal 2016, with the endowment posting negative 2 percent returns for the year ending June 30 and failing to exceed its internal benchmark. The five-year annualized return of 5.9 percent, while marginally exceeding the 5.4 percent benchmark return, lagged substantially behind what a traditional 60 percent equities/40 percent bonds portfolio would have delivered at 8.9 percent. The fiscal 2016 results were described by interim CEO Robert Ettl as "disappointing" and represented the endowment's lowest returns since the financial crisis.
Beyond performance issues, Harvard's in-house investment model had faced sustained criticism regarding compensation levels for internal staff and, more recently, persistent underperformance relative to passive benchmarks and alternative strategies. The outsourcing plan, sources indicate, was clearly part of Narvekar's mandate as he took the helm of the endowment, suggesting the board expected comprehensive restructuring to address these structural challenges and restore competitive returns.
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