Harvard's new fund boss needs a California lesson

2014-10-10

Harvard's new money manager needs a California lesson. Stephen Blyth is taking over the university's $36 billion endowment at a time when its investment strategy looks to be faltering. Its 2014 performance was even bested by Ivy League rival Yale. CalPERS' decision to ditch fee-heavy hedge funds may give Blyth a useful roadmap for reviving returns.
Harvard's endowment grew rapidly under Jack Meyer, its president from 1990 to 2005, with assets under management rising from $4.7 billion in 1990 to $22.6 billion in 2005. Since Meyer left, HMC has employed four managers in nine years during which performance has suffered. In the latest year to June 2014 the endowment returned 15.4 percent compared with 20.2 percent by the Yale endowment � and 25 percent on the Standard & Poor's 500 stock index.

Blyth retains strong ties to academic life, serving as a professor of statistics at Harvard even while managing the endowment's public markets portfolio. In the latter effort his performance has been unspectacular. Over the last year, Harvard outperformed low returns in the public debt markets, but underperformed the high returns available in public equity; over five years Blyth achieved modest outperformance in both sectors.

Harvard's overall outperformance of its benchmark over one-year and five-year periods has been due primarily to its ability in picking the right hedge funds. Harvard's litter outperformed competitors over one and five years, though their absolute performance has been mediocre.

Blyth's appointment comes just after the $297 billion California Public Employees' Retirement System has announced its intention to divest its $4 billion portfolio of hedge fund investments, stating that the funds' complexity and cost, and their inability to scale to a meaningful size in the CalPERS context, no longer warranted their inclusion.

Harvard itself has within the last year increased its allocation to private equity and hedge funds to 34 percent from 31 percent. However, even with apparently superior hedge fund selection abilities, its investments in the sector have underperformed those in every other sector, trailing returns on the overall endowment by some 2 percentage points annually over the last decade, suggesting that value for money may not be there.

Harvard's choice of Blyth from within its ranks suggests an attempt to bring its competitive advantage of superior intellectual firepower to bear on its investment problem. It can begin doing so by reviewing whether paying outsiders hefty fees for sub-par returns is truly optimal.