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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Harvard University's endowment fund is the stuff of legend. It's

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Speaker 2: larger than the endowment of any other university on the planet,

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Speaker 2: and larger, in fact, than the GDP of many countries.

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Speaker 1: As of June twenty twenty three, the last time that

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Speaker 1: they've given us a public value, it's fifty point seven

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Speaker 1: billion dollars.

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Speaker 2: But Janet Lauren, who covers higher education at Bloomberg, says

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Speaker 2: this was not always the case. It's only in the

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Speaker 2: last few decades that Harvard's endowment went from an approach

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Speaker 2: that could be described as kind of vanilla investing mostly

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Speaker 2: in stocks and bonds, to something very different, involving hedge

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Speaker 2: funds at private equity. That move made the Harvard Management Company,

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Speaker 2: which oversees the endowment in investing powerhouse. In its heyday,

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Speaker 2: it employed more than two hundred people at him still

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Speaker 2: pays some staffers millions of dollars every year. The growth

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Speaker 2: of Harvard's endowment is thanks in large part to the

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Speaker 2: vision of one man, Jack Meyer, who oversaw it for

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Speaker 2: more than a decade. He embraced risk, and that paid off.

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Speaker 1: They were extremely successful. They were the envy of the world.

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Speaker 2: Meyer's method quickly propelled the Harvard Management Company into financial superstardom.

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Speaker 2: Universities and colleges studied its approach and tried to emulate

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Speaker 2: its success, But in the meantime, Myer's method as it

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Speaker 2: evolved was not without controversy. Scrutiny of compensation awarded to

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Speaker 2: Meyers managers eventually led to his departure. Now, Harvard's endowment

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Speaker 2: is at another crossroads. After years of lagging returns. Many

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Speaker 2: say Harvard's pioneering fund has lost its edge to competitors.

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Speaker 1: At the turn of the century, Harvard was double the

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Speaker 1: size of Yale, and now they're only twenty five percent

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Speaker 1: larger than you.

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Speaker 2: This is the big take from Bloomberg News. I'm David

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Speaker 2: Gera today on the show The Harvard Management Company. It

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Speaker 2: turns fifty this year, and celebrations may be kind of

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Speaker 2: muted despite its legendary status. We look at the rise

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Speaker 2: and the plateauing of what's become the most famous endowment

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Speaker 2: fund in the world. How Jack Meyer blazed a new

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Speaker 2: trail for the world's universities and other nonprofits, and why

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Speaker 2: building on that success has proven to be so difficult

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Speaker 2: for Harvard how did Harvard's endowment get as big as

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Speaker 2: it is today? I guess how long has it been around?

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Speaker 2: And when it it kind of have its most dramatic growth.

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Speaker 1: So Harvard is the oldest and richest college in America.

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Speaker 1: So they started getting donations, you know, hundreds of years ago,

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Speaker 1: and you've heard of the principle of compounding interests. That

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Speaker 1: has certainly helped them for years. The managers of Harvard's

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Speaker 1: endowment followed a pretty straightforward strategy like other schools of

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Speaker 1: its age and status, Most college endowments just invested in

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Speaker 1: a traditional stocks and bonds portfolio.

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Speaker 2: But in the nineteen nineties, when Jack Meyer took over

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Speaker 2: the Harvard Management Company, the institution that oversees the endowment

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Speaker 2: and is separate from the university, he advocated for a

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Speaker 2: much more diversified portfolio.

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Speaker 1: Jack Meyer at Harvard pioneered the idea of more liquid

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Speaker 1: assets private equity hedge funds.

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Speaker 2: This way of thinking wasn't necessarily new. In the nineteen sixties,

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Speaker 2: the Ford Foundation, a philanthropy that has its own sizeable endowment,

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Speaker 2: published a report with this central idea that a university

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Speaker 2: like Harvard, which has a time horizon hundreds of years

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Speaker 2: long can afford the risk of more volatile, illiquid investments

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Speaker 2: such as venture capital and private equity, and Janet says

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Speaker 2: Meyer saw the opportunity to make a change.

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Speaker 1: He built sort of an in house hedge fund. It

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Speaker 1: really is not an exaggeration to say Harvard literally built

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Speaker 1: its own hedge fund.

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Speaker 2: Meyer's ideas proved to be very lucrative under his leadership.

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Speaker 2: Harvard's endowment grew from four point eight billion dollars to

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Speaker 2: twenty five point nine billion by most measures a stellar performance.

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Speaker 2: That's money that goes to university operations like professor's salaries

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Speaker 2: and libraries, but also to graduate fellowships and scholarships. They

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Speaker 2: recruited portfolio managers from Wall Street men and women who

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Speaker 2: could have just as easily taken jobs at top hedge

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Speaker 2: funds and private equity firms. But for all his success,

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Speaker 2: Jack Meyer's strategy and the compensation packages for his managers

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Speaker 2: that came with it started to draw scrutiny, especially from

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Speaker 2: donors from Harvard alumni.

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Speaker 1: The pay was an issue for a long time. Jack

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Speaker 1: Meyer paid for performance, and the performance was so spectacular.

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Speaker 1: In one year, they paid a bond trader thirty five

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Speaker 1: million dollars. Wow, and there was a whole group of

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Speaker 1: alumni the class of sixty nine. Mary famously said, this

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Speaker 1: is just not right for a nonprofit to be paying

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Speaker 1: people so much money.

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Speaker 2: Eventually, at Harvard, Jack Meyer left, he started his own firm,

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Speaker 2: and others followed suit. Harvard's endowment started bleeding talent and

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Speaker 2: turnover at the top became an issue.

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Speaker 1: They had an interim for a bit, and then they

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Speaker 1: had Muhammad Alarian, who had good returns when he was there,

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Speaker 1: but he decided to go back to PIMCO, so he

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Speaker 1: was there for less than two years, and then they've

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Speaker 1: had several interims, and then they had Jane Mindelo. She

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Speaker 1: was there for a longer tenure but was hit with

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Speaker 1: the global financial crisis. Harvard had the worst return to

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Speaker 1: the Ivy League schools. I think it was minus twenty

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Speaker 1: seven percent and they had to take a long time

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Speaker 1: to recover. Then she left, Then somebody came in for

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Speaker 1: less than two years, and then there was another interim,

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Speaker 1: and now they have their current chief executive officer. But

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Speaker 1: that's a lot of people over a lot of time,

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Speaker 1: and you know when you have somebody coming in new

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Speaker 1: They switched.

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Speaker 2: Strategies the constant change in leadership and strategy has left

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Speaker 2: Harvard's endowment in a bind, struggling to emulate the success

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Speaker 2: it once had and having to defend diminishing returns. Janet

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Speaker 2: says years of turmoil have taken their toll.

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Speaker 1: So over the last ten years, Harvard's annualized return is

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Speaker 1: eight point two percent, which sounds good, But when you

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Speaker 1: look at the rest of their peers funds over five

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Speaker 1: billion dollars, they're in the bottom twenty percent. That's not

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Speaker 1: a place you would ever think of Harvard being. And

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Speaker 1: for the last twenty years, a twenty year annualized return

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Speaker 1: is they're in the bottom forty percent. And what about

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Speaker 1: Yale top ten percent?

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Speaker 2: After the break, as Harvard was losing its edge, competitors,

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Speaker 2: including one of its fiercest rivals, used strategies Harvard pioneered

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Speaker 2: to make billions of their own. Well, Harvard's endowment is

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Speaker 2: struggle to see the kind of returns had gotten the past.

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Speaker 2: Bloomberg's Janet Lauren says other colleges and universities have also

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Speaker 2: pursued aggressive investment strategies. Is it alone at the top

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Speaker 2: of the list of college and university endowments? Who's kind

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Speaker 2: of nipping at its heels if anyone.

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Speaker 1: Well, the University of Texas. And I did a story

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Speaker 1: that I really enjoyed a couple of years ago that

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Speaker 1: looked at oil in the University of Texas and why

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Speaker 1: is the University of Texas so rich? And the answer

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Speaker 1: is because they have two point one million acres in

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Speaker 1: West Texas that the state designated for higher education in

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Speaker 1: the eighteen hundreds, and then in nineteen twenty three oil

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Speaker 1: was discovered and now it's the Permian Basin, and a

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Speaker 1: couple of years ago they got two billion extra dollars

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Speaker 1: just from the price of oil in production.

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Speaker 2: And it's not just oil money coming for Harvard's enviable gains.

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Speaker 2: Also nipping at Harvard's heals the bulldogs Yale, Harvard's longtime rival,

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Speaker 2: and that is extremely unpawered palle to many Harvard alums.

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Speaker 2: Janet says Yale also deserves credit for early innovations and

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Speaker 2: endowment investing thanks to David Swenson, who managed Yale's endowment

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Speaker 2: when Jack Meyer was running Harvard's.

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Speaker 1: Alongside Jack Meyer, there was a guy at Yale who

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Speaker 1: took over the endowment in nineteen eighty six. David Swinson,

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Speaker 1: who was an economist trained at Yale, and he also

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Speaker 1: pioneered this idea of liquid assets, you know, the illoquidity premium,

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Speaker 1: and he also did spectacularly well, but he had a

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Speaker 1: very different model.

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Speaker 2: Yale's endowment did very well under Swinson's stewardship, and he

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Speaker 2: managed to avoid the pushback jack Meyer got partly because

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Speaker 2: Yale didn't employ a large, well paid investment staff like Harvard,

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Speaker 2: and compared to Harvard, it's been a lot more stable.

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Speaker 1: Instead of hiring people to work for Yale, they found

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Speaker 1: partners that literally partners who could work with them for

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Speaker 1: you know, ten, twelve longer years. They have head managers

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Speaker 1: in their portfolio for a very long time. Managers love

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Speaker 1: to have Yell's money, Janet says Brown, Princeton, MIT, and

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Speaker 1: others have seen record returns on their endowments, which have followed,

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Speaker 1: to some extent, the same type of model as Yale,

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Speaker 1: using outside managers.

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Speaker 2: And at the same time as the performance of Harvard's

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Speaker 2: endowment has been lagging many of its peers. The university

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Speaker 2: has faced a lot of high profile problems. Its response

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Speaker 2: to student protesters last October following Hamas's attack on Israel

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Speaker 2: and the resignation of the school's president, Claudine gay Jenik.

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Speaker 2: We talk about some of the pressure that Harvard has

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Speaker 2: been under. I know that over the last year there

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Speaker 2: have been a number of alumni, very vocal alumni, who

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Speaker 2: have said that, in light of the way the university

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Speaker 2: responded to what happened on October seventh, they're going to

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Speaker 2: withhold their donations. Is that something that's worrisome to the

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Speaker 2: Harvard management company, to Harvard broadly, that you have these

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Speaker 2: well healed donors who are deciding not to give money anymore.

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Speaker 1: Yes, Harvard has raised over a billion dollars every year

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Speaker 1: since I think twenty fourteen, every year, every year, and

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Speaker 1: they're very good at what they do. And you know,

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Speaker 1: you think, well, maybe somebody from you know, the class

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Speaker 1: of nineteen eighty is upset and decides to withhold you know,

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Speaker 1: their five hundred dollars donation forever. Okay, you still getting

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Speaker 1: you know, millions from other people. But you know, maybe

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Speaker 1: that person has a lot of classmates who are doing

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Speaker 1: the same thing.

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Speaker 2: Janet says, even as returns have been declining, Harvard has

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Speaker 2: been relying on its endowment more and more to fund operations.

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Speaker 2: Last year, Harvard spent more than two billion dollars from

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Speaker 2: investment earnings out of the fund, and that made up

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Speaker 2: more than a third of Harvard's operating budget for the year.

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Speaker 2: If that continues to happen, it risks diminishing Harvard's endowment further.

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Speaker 2: For all of its struggles, she points out, Harvard still

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Speaker 2: has the largest endowment fund in the world, larger than

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Speaker 2: the GDP of Morocco, so we probably don't have to

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Speaker 2: worry too much for the Crimson. This is The Big

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Speaker 2: Take from Bloomberg News. I'm David Gura. This episode was

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Speaker 2: produced by Thomas lou It was edited by Stacy Vanocksmith

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Speaker 2: and John Heckinger. It was fact checked by Alex Sekura.

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Speaker 2: It was mixed by Alexander Dubois. Our senior producer is

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Speaker 2: Naomi Shaven, who helped edit this episode. Our senior editor

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Speaker 2: is Elizabeth Ponso. Our executive producer is Nicole Beemster. Bor

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Speaker 2: Sage Bauman is Bloomberg's head of Podcasts. If you liked

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Speaker 2: this episode, make sure to subscribe and review The Big

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Speaker 2: Take wherever you listen to podcasts. It helps people find

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Speaker 2: the show. Thanks for listening. We'll be back tomorrow,