Hey there, ready to dive into a really interesting story? Cool, hold onto your seat and enjoy this fun ride. Let’s chat a bit about the world’s heavyweight educational fund’s latest wrestling match – no, not a WWE main event, just a top management swap and it’s pretty clear why it was necessary.
Harvard Management Company, that’s the brain-box working magic on Harvard University’s humongous $36 billion endowment, strategically appointed N.P. Narvekar, (formerly of Columbia University), as its new CEO. The tough-as-nails Columbia alum outdid Harvard with an impressive 10.1% return on investment over the past decade, leaving Harvard’s own 7.6% yearly gains in the dust. Pow!
No wonder the nerds at Harvard were in a tizzy, especially with the 2% loss their investment fund took recently. To make things worse, Ivy League rival, Yale, boasted a 3.4% increase over those same months. You can practically hear the echoing “Oh, come on!” from the Harvard quarters.
And the previous year wasn’t a rose garden either, with Harvard’s endowment standing second-to-last among its Ivy preppy club, delivering a meager 5.8% gain, barely half of Yale’s moments of glory. Where’s Harvard’s spirit, it makes you wonder.
Now, you may be wondering why the stark contrast in performance, surely both follow the same Wall Street playbook?
Surprisingly, they do! They evenly spread their endowments across various asset classes – from local and foreign stocks and bonds, land and natural resources, to private equity and “absolute return” hedge fund strategies.
Few ticks here and there in management though, can cause a big swing, my friend. And while most of us can’t even poke our noses in premium ventures like private equity, Harvard and Yale’s performances, more like the performances of the hare and the tortoise, shower some worthy insights for us, the pedestrian folk.
## 1. Keep Your Eyes on the Prize
Peruse any research on investing and you are bound to see one mantra – your mix of asset types has a far greater influence on long-term returns than choosing individual stocks or bonds. The “asset allocation”, they call it.
Our Ivy League friends both understand this, but Yale’s approach is laser focused.
This fixation lets Yale’s Investment Office run a lean operation with just 30 staff members. Most of their routine decisions of picking securities and executing trades are outsourced to big-shot external money managers which allows their in-house experts to deal with developing the right mix of investments.
Harvard, on the other hand, has a foot in each boat with a “hybrid” model. Besides setting asset allocation policies and outsourcing deals to external firms, their in-house team also has a hand in managing a significant portion of the endowment – choosing securities, overseeing trades, and all that jazz.
In doing so, they’ve got a big family of over 200 investment professionals, way bigger than Yale’s army.
## 2. The One Who Wears the Crown
Just like in the Game of Thrones, constant leadership changes make for unstable kingdoms. Yale’s David Swensen has reigned over the university’s endowment for three decades, consistently delivering an annual return of about 14%. He’s beaten not just his fellow academic institutions but the broader market as well. Some say he’s developed “the Yale Model.”
In contrast, Harvard has seen a revolving leadership door.
Your investment style tends to shift every time there’s a new manager. For instance, Mohamed El-Erian shifted the portfolio towards derivatives, hedge funds, and emerging markets. Jane Mendillo later altered the course towards a more conventional asset allocation. Remember the Game of Thrones? Every new direction bloats your portfolio – increases turnover – and that has been consistently shown to reduce returns.
## 3. Copycats Beware—Unique Triumphs are Tough to Imitate
In recent times, Harvard under Stephen Blythe and interim CEO Ettl tried to mimic Yale by shifting more equity management duties to outside managers.
Even the new guy, Narvekar, is known for his lean teams and use of external firms – just like master Swensen’s model at Yale.
However, copying someone’s success in the investment world is easier said than done.
Funny enough…even Swensen says that individual investors shouldn’t attempt to copy the strategies of Yale’s endowment. He advises touching all bases for a well-diversified portfolio while pouncing on low-cost, low-turnover index funds for your best shot at long-term growth.
Some fund pundits believe Harvard’s endowment should also walk down this path. While the endowment has outscored traditional stock and bond indices over 15 years, its risk-adjusted returns are pretty much the same as a simple 60% stock/40% bond portfolio, making the effort versus reward a questionable prospect.
Learning how to minimize costs, make use of index funds, and practice buy-and-hold investing are just as relevant for your tiny 401(k) as they are for the multi-billion-dollar endowment of Harvard. That’s the gist of it really, and a huge lesson from the tale of two Ivies – Harvard and Yale.