Keeping it Simple

The Harvard Management Company (HMC) recently reported an investment return of 8.1% for the fiscal year ending June 30, 2017. While the endowment is one of the largest in the world at $37.1 billion, the return is one of the lowest returns compared to other endowments. Other endowments such as Yale’s returned 11.3%, Duke’s 12.7%, MIT’s 14.3%, and one of highest returns was University of California’s at 15.1%.

Ever since Jack Meyer left in 2005, investment returns at HMC have been inconsistent at best. Jack managed HMC from 1990-2005, and during his tenure, the endowment earned an annualized return of 15.9%. He was forced out because many alumni were upset by the size of his annual bonus. The HMC endowment has struggled since his departure as other managers have either left to find more lucrative opportunities or were fired.  It has gotten so bad that HMC is laying off approximately half of its 230-person staff.

If there isn’t a Harvard Business case study on what went wrong, then one should be written. But there have been other outside business consultants who have conducted internal reviews. The Harvard Crimson wrote back in January, “Beyond its lackluster returns, the firm’s employees also privately criticized HMC’s workplace culture as “lazy, fat, and stupid” in a 2015 internal review conducted by McKinsey and Company, accusing their employer of setting artificially low benchmarks and overcompensating its executives.” 

This is a very harsh assessment. I believe that the real problem with HMC is that it’s portfolio construction is too complex. They invest in internally-managed hedge funds, direct real estate investments, natural resources, and other types of alternative investments. In my opinion, HMC has outsmarted themselves. HMC has been overhauling the endowment for five years running. My biggest lesson learned from HMC’s poor returns, is to keep it simple. Here is a good example of what I mean by keeping it simple:

Steve Edmundson made headlines last year when the Wall Street Journal wrote an article on his success as a endowment portfolio manager. The title of the article was, How one man in Nevada is trouncing the Harvard endowment. He manages the Nevada State Pension fund, which is about the same size as Harvard’s endowment. The difference is that he doesn’t have any internal professional staff. He doesn’t take phone calls from outside managers and he only invests in low-cost exchange traded funds. He tries to keep investing costs low and does not trade too often. Other endowments are now beginning to mirror his successful investment model. There are even major U.S public pensions following his example.

I spent most of my entire career working with and researching the largest U.S. institutions and retirement companies. I gained firsthand insight that Steve’s investment approach was far superior to that of Harvard’s complex approach to investing. Much like Steve, I have never held a meeting with another company selling me a product. This would be a complete waste of my time. A better use of my time is helping my clients meet their goals through customized asset allocation.

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