Harvard University’s $37 billion endowment returned 8.1% for the fiscal year ended June 30, compared to a 2% loss in 2016. Despite the turnaround, Harvard Management Company (HMC) CEO Narv Narvekar called the gains disappointing.
The annual gains were attributed to strong returns from public equity, private equity, and real estate investments, while natural resources lagged.
“Our performance is disappointing and not where it needs to be,” said Narvekar in a letter addressed to the Harvard community. “The endowment’s returns are a symptom of deep structural problems at HMC and the resultant significant issues in the portfolio. These matters have challenged HMC for years.”
He said that the issues that have hurt the endowment’s performance in the past will continue to negatively impact returns in the near term, and that they will require time to overcome.
“The HMC Board of Directors and I expect that it will take a number of years to reposition HMC in order to perform up to our expectations,” Narvekar said. “As those highly familiar with endowment investing understand, change takes time.”
In the letter, Narvekar also outlined some significant changes being employed that HMC hopes will improve the endowment’s performance.
Narvekar said HMC changed its investment approach from focusing on specific asset classes toward a generalist investment model in which all members of the investment team take ownership of the entire portfolio.
“The team will have a singular focus: the performance of the overall endowment,” he said. “We will engage in focused debate and discussion about investment opportunities, both within asset classes and across the investment universe. Other highly successful endowments have used elements of the generalist model, and HMC will create its own version.”
HMC has also created a new risk allocation framework that will replace the asset allocation approach it previously used. Narvekar said the model is different from past HMC approaches, and that the first phase of building and integrating the framework into its investment decision-making has been completed.
“We will determine with the University’s financial team the appropriate risk level for Harvard,” he said. “Our dialogue with this team is just beginning, and we expect it to grow over time, allowing us to achieve this important understanding and objective.”
Additionally, Narvekar said HMC has also largely exited internal management of public markets assets, despite the lower fees and expenses associated with the practice.
“I strongly believe that the changes we are making as an organization will produce better returns for Harvard in a more efficient manner over time,” he said.