Jane Mendillo, who has run Harvard University’s $33 billion endowment for six years, has announced that she will be leaving the position by the end of the year. Her run at Harvard has been tumultuous and in some ways exemplifies the disappointment of big shot and highly compensated money management in the years since the financial crisis.
The Harvard Management Co., money machine was the creation of Jack Meyer. Before Meyer, university endowments didn’t look like hedge funds, but Meyer helped changed that when he started actively managing large portfolios internally and posting big investment returns at Harvard starting in 1990. That he did this at Harvard only added to the mystique. Meyer not only made huge amounts for Harvard’s endowment, he also made big money himself. Both he and his portfolio managers could collect paychecks in the tens of millions of dollars annually, a development that was loudly opposed for years by members of Harvard’s class of 1969. Meyer left Harvard in 2005 to start his own hedge fund, Convexity Capital Management.
It was Meyer’s recommendation that helped Mendillo get the job running Harvard Management Co., starting in July 2008. Mendillo worked for Meyer at Harvard before going on to run Wellesley College’s endowment. Within months, Harvard was facing a serious liquidity crisis after Lehman Brothers collapsed.
Mendillo likes to say that she inherited the financial problems that hit and humbled Harvard during the financial crisis. There is truth to that assertion. Lawrence Summers had made a multi-billion dollar bet on interest rates when he was president of Harvard that backfired big time. Mohamed El-Erian, who replaced Meyer at Harvard Management Co., had built large illiquid positions and derivatives bets that gave the endowment exposure to commodities and foreign stocks. When the financial crisis hit, Harvard faced a cash crunch when these interest rate and total return swaps went in the wrong direction.
El-Erian left Harvard in September 2007 to become co-chief investment officer at Pacific Investment Management Co., where he was paid as much as $100 million annually. (He left Pimco this year after the bond giant was hit with large redemptions and disappointing returns.) Still, there was plenty of time to undo El-Erian’s aggressive positions at Harvard after he left. Mendillo, who made about $5 million annually at Harvard, maybe could have done it after she took over in July 2008. El-Erian also had implemented so-called Armageddon insurance that was partly taken off after he left Harvard.
Mendillo made a big push after the financial crisis to reduce risk. Harvard’s endowment has not performed well in the years since the financial crisis. It now manages $2 billion less than when Mendillo took over even though the stock market has soared (the endowment has been spending billions of dollars on Harvard’s expenses and capital expenditures).
In the five years ending June 30 of 2013, Harvard’s endowment posted an annualized return of 1.7%. That is the worst among the Ivy League, according to The New York Times, which cited data compiled by Charles A. Skorina, the founder of an executive search firm that specializes in hiring chief investment officers. Part of the reason, as Mendillo points out, was Harvard Management’s lousy performance during the financial crisis and the hangover that caused Harvard to miss opportunities in the immediate aftermath. Still, Harvard’s endowment returned 11.3% for the year ending June 30, 2013. The Wall Street Journal pointed out that performance is below the 11.7% average posted by 835 U.S. colleges and universities in the same period, according to the Nacubo-Commonfund Study of Endowments. It also underperformed in its fiscal 2012.
There have been indications that even Meyer has in some ways had a difficult time recently. He has proven very good at raising money for his Convexity Capital Management, which manages $14 billion. His performance has been tough to track. Meyer appears to enjoy the privacy that comes with running a hedge fund as opposed to a relatively transparent university endowment. Convexity is viewed as secretive even by the standards of the opaque hedge fund community. Last year Convexity told its investors that it was frustrated by some subpar performance, according to a report by Institutional Investor’s Alpha.
General underperformance by top paid money managers has been a consistent theme in the years since the financial crisis. There have been some notable exception, but not at Harvard.
