Key Takeaways
- • Harvard University's $35.7 billion endowment will outsource management of most assets, shut down its internal hedge fund by mid-2017, and reduce staff by approximately 50 percent under new CEO N.P. Narvekar's restructuring plan.
- • The endowment will retain in-house management only for its natural resources portfolio and passive exchange-traded funds, marking a fundamental reversal of Harvard's decades-long hybrid investment model that had emphasized internal asset management.
- • Harvard's 2016 fiscal year performance deteriorated sharply, with the endowment losing $2 billion in value, posting a negative 2 percent return, and failing to beat its internal benchmark—the lowest returns since the 2008 financial crisis.
- • The endowment's five-year annualized return of 5.9 percent, while slightly above its 5.4 percent benchmark, significantly underperformed a standard 60/40 equity-bond portfolio, which would have delivered 8.9 percent annually, signaling structural challenges with the in-house management strategy.
- • Narvekar, hired in October 2016 from Columbia University where he served as CEO since 2002, inherited an organization facing both performance scrutiny and compensation criticism, prompting this strategic pivot toward external asset managers.
Summary
Harvard University is fundamentally restructuring its endowment management by outsourcing most of its $35.7 billion in assets to external managers, according to reporting from the Wall Street Journal and Institutional Investor. The overhaul, proposed by newly appointed CEO N.P. Narvekar, represents a decisive reversal of Harvard's long-standing investment philosophy that had relied heavily on in-house management across multiple asset classes.
Under the restructuring plan, Harvard Management Company will shut down its internal hedge fund operation by the middle of 2017 and lay off approximately half of the endowment's investment staff. The endowment will spin out its internal real estate team while retaining in-house management only for its natural resources portfolio and passive exchange-traded funds. This represents a dramatic departure from the hybrid model that had characterized Harvard's approach for decades, wherein a substantial portion of endowment capital was managed internally rather than delegated to external firms.
The restructuring is being driven by significant performance deterioration. Harvard's endowment lost $2 billion in value during fiscal year 2016, posting a negative 2 percent return—described as "disappointing" by interim CEO Robert Ettl—and marking the lowest returns since the 2008 financial crisis. More critically, the endowment failed to beat its internal benchmark and significantly lagged broader market alternatives. Its five-year annualized return of 5.9 percent, though marginally exceeding the 5.4 percent benchmark portfolio, fell substantially short of what a simple 60 percent equities/40 percent bonds allocation would have delivered (8.9 percent annually). This underperformance, combined with longstanding scrutiny over in-house compensation levels, weakened the case for maintaining the internal investment apparatus.
Narvekar, 54, was recruited in October 2016 to lead the endowment, joining from Columbia University where he had served as CEO since 2002. Sources indicate the outsourcing strategy was already "clearly on the table" as Narvekar prepared to assume his position, suggesting a comprehensive transformation was anticipated rather than an ad hoc response to recent underperformance. The shift positions Harvard to compete more effectively with peer institutions and external managers while reducing organizational complexity and fixed compensation costs.
Under the restructuring plan, Harvard Management Company will shut down its internal hedge fund operation by the middle of 2017 and lay off approximately half of the endowment's investment staff. The endowment will spin out its internal real estate team while retaining in-house management only for its natural resources portfolio and passive exchange-traded funds. This represents a dramatic departure from the hybrid model that had characterized Harvard's approach for decades, wherein a substantial portion of endowment capital was managed internally rather than delegated to external firms.
The restructuring is being driven by significant performance deterioration. Harvard's endowment lost $2 billion in value during fiscal year 2016, posting a negative 2 percent return—described as "disappointing" by interim CEO Robert Ettl—and marking the lowest returns since the 2008 financial crisis. More critically, the endowment failed to beat its internal benchmark and significantly lagged broader market alternatives. Its five-year annualized return of 5.9 percent, though marginally exceeding the 5.4 percent benchmark portfolio, fell substantially short of what a simple 60 percent equities/40 percent bonds allocation would have delivered (8.9 percent annually). This underperformance, combined with longstanding scrutiny over in-house compensation levels, weakened the case for maintaining the internal investment apparatus.
Narvekar, 54, was recruited in October 2016 to lead the endowment, joining from Columbia University where he had served as CEO since 2002. Sources indicate the outsourcing strategy was already "clearly on the table" as Narvekar prepared to assume his position, suggesting a comprehensive transformation was anticipated rather than an ad hoc response to recent underperformance. The shift positions Harvard to compete more effectively with peer institutions and external managers while reducing organizational complexity and fixed compensation costs.
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