The most fundamental questions investors face are all about risk. How much should you take? How much can you stomach? It’s literally an acid test.
These are important issues to people managing a few thousand dollars from a kitchen table and portfolio managers directing billions from a corner office. Today, let’s put them to Harvard University.
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To state the obvious, Harvard has a lot of dough. The university’s $36.4 billion endowment is the biggest on the planet and it pays for about a third of the school’s operating budget. That’s why Harvard is by far the least expensive university in Greater Boston after factoring in financial assistance (most other local schools, from Boston University to Suffolk University, cost students twice as much on a net basis).
But Harvard has risk issues. Harvard Management Co., the school’s investment arm, has been trying to squeeze risk out of the endowment ever since the fund took a beating in the financial crisis. That sounds like it should be a good thing, but Harvard’s once-stellar investment performance became lackluster year after year while it tried to make the portfolio safer.
The endowment earned 15.4 percent in its most recent fiscal year, which ended June 30. That should put Harvard in the middle of the endowment world but near the bottom of the Ivy Leagues.
Harvard had ranked last among Ivy endowments for five-year performance before the fiscal 2014 numbers were reported, according to Charles Skorina Co., an executive search firm for institutional money managers. There’s a good chance that Harvard will remain at the bottom when the numbers are updated.
Now compare Harvard with the ultimate vanilla portfolio, which is invested 60 percent in the SP 500 stock index and 40 percent in a standard bond index (I used the Vanguard Balanced Index Fund as a proxy). Harvard’s endowment trailed that auto-pilot fund over one, three, and five years.
Harvard Management was once the envy of the endowment world. Former president Jack Meyer used to hire star managers and pay them performance-based fortunes. That operation became large and expensive, but it grew the endowment from $4.8 billion to $25.8 billion over 15 years.
Mohamed El-Erian succeeded Meyer in 2006. He liked to say Harvard’s biggest investment advantage was the university’s infinite time horizon. It could afford to think really long term.
But the financial crisis put a dent in Harvard’s infinite horizon. El-Erian was gone and Jane Mendillo replaced him shortly before the endowment’s portfolio took a hard fall. Worse, the university had invested its operating cash account in the essentially cashless endowment portfolio. Harvard was forced to sell assets at the worst possible time to raise money.
Now, years later, what does Harvard think about risk and reward in its investment portfolio? A new top endowment executive, Stephen Blyth, was named last week to succeed Mendillo at the end of the year. He’ll have to figure it out.
There is no right answer to the question. Harvard was once very successful as an aggressive investor and certainly could become one again. But Harvard already has many billions it depends upon in ways other schools can only envy. Limited risk isn’t so bad.
But it’s hard to have it both ways. Everyone who has spent more than a couple of years investing a 401(k) account knows how that works. Harvard is in the same boat with you.
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Trial balloon No. 1: Call me a homer, but are the headhunters who are looking for a new president of the Greater Boston Chamber of Commerce going to come up with a better candidate than my former publisher, Chris Mayer? I doubt it. His leadership skills and connection to the city’s business community would be hard to match. Suffolk Construction chief John Fish and Hill Holiday CEO Karen Kaplan are leading a committee looking for a successor to the retiring Paul Guzzi.
Trial balloon No. 2: I’m not sure why he would want the job, but Eastern Bank Corp. president Jan Miller has emerged in Washington as a candidate for an open seat on the Federal Reserve Board of Governors. One of those seats is supposed to be reserved for a community banker. The catch: A current board member, Daniel Tarullo, is considered a New Englander and no region gets more than one seat. Tarullo is both influential and controversial inside the Fed. He has served on the board for five years.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.