Lessons From The Harvard Management Co.

The Harvard Management Co. announced this week that it’ll be sending half its employees home for good and outsourcing most of its money management.

It’s a big change for an endowment that for many years was the best money manager in the business; but since 2005, the fund’s fortunes have changed.

HMC lost money in FY2016, returning -2% even as its benchmark portfolio returned 1% and broader markets grew even more.

Are there any lessons to learn from HMC? Barry Ritholtz think so. He writes at Bloomberg:

No. 1. When a money manager is outperforming the benchmarks, leave them alone: Under Meyer, HMC had captured lightning in a bottle. Messing with that rare and delicate thing is simply foolish. Harvard had to learn that the hard way.

No. 2. Simpler and cheaper beats complicated and expensive: Investing luminaries such as Charles Ellis, Jack Bogle and Burton Malkiel have long argued that the simpler and cheaper a portfolio is, the better its long-term performance. This is true even for a $37 billion endowment like Harvard’s.

No. 3. Opining about things you know nothing about is an expensive self-indulgence: The second-guessing of outsiders who thought they knew better is a perfect example of this. The Harvard professors and alums who deemed themselves more insightful about the mysteries of investing than the professionals is just the sort of hubris that the trading gods love to punish. This 2004 New York Times article about how much higher Jack Meyer’s pay was than that of Yale Chief Investment Officer David Swensen sums up the critics’ complaints — and naivete. What the critics accomplished was saving millions of dollars in management compensation while forsaking billions of dollars in returns. That was a dumb trade.

No. 4. Costly, underperforming alternative investments are on notice: This is part of a broader trend that was first thrust into view in 2014, when the giant California Public Employees Retirement System (CalPERS) pension fund said it was dumping its hedge fund investments, and reducing other so-called alternative investments. But pension funds and endowments move slowly; Harvard has had six different endowment managers before reaching the same conclusion as CalPERS. Other pension funds and endowments are likely to find religion as well. (Are you listening, New York?) It’s inevitable that pensions and endowments will also cool on venture capital and private equity.

Read the rest of the lessons at the link.

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