How much does a University President make? How about an endowment chief? Who makes more?
Charlie Munger said it best: show me the incentive and I’ll show you the outcome.
HMC’s 990 form for fiscal year 2018 includes both employees who were compensated under the organization’s old pay structure and those who were compensated under the current one. HMC’s pay formula used to provide a base salary, with the large majority of bonus compensation depending on investment managers’ performance. The bonuses were awarded by measuring managers’ performance against overall market returns for their asset class; a portion of the bonus itself was held back in the endowment and subject to being “clawed back” if they underperformed in subsequent years (a system intended to encourage long-term thinking). In one of the steps taken since he joined HMC in December 2016, Narvekar changed this system: beginning in fiscal year 2018, bonuses are awarded according to the endowment’s overall performance, not according to asset class. Most of the organization is now working under this new framework.
The endowment is barely a year into its five-year transformation.
Refining his description of that transition, Narvekar wrote that those significant changes “require a five-year timeframe to reposition the organization and portfolio”—a message he has underscored continuously. But he added a phrase about “subsequent strong performance.” For those who may have missed the subtlety, that suggests that remaking HMC and activating its new investment disciplines; refining its risk framework (involving at least a two-year collaboration with HMC’s board and the University, to begin soon); reestablishing relationships with superior external fund managers; and getting them money to invest, are all encompassed within that five-year transition—after which the harvesting of presumably superior results should show up. That is the nature of investing in long-term, illiquid assets, where those higher risks and returns reside over time. But it is also the nature of achieving superior returns over the course of an entire investment cycle. Doing so is critical to the definition of HMC’s aim, as he put it, to “ensure that Harvard University has the means to continue its vital role as a leader in teaching and research for future generations.”
Meanwhile, the school is tightening its belt.
The College’s finances are particularly responsive to the national economy because thirty percent of the College’s $60 million budget comes from Harvard’s nearly $40 billion endowment. The College’s revenue is a subset of the Faculty of Arts and Sciences’, 51 percent of which was derived from the University’s endowment in fiscal year 2018.
Over the past three years Harvard’s endowment returned to and then surpassed its pre-crisis size, though endowment returns still lag behind those at other Ivy League schools. Harvard Management Company, which oversees the endowment, has continued to report lower percentage growth than every other Ivy League school.
Post by Marcelino Pantoja