Profile of Jack Meyer, (former) Harvard Management Company President

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As background for my next blog post about Dr. Mohamed El-Erian (current President and CEO of Harvard Management Company), I’ve attached below an article I wrote for the Harvard Business School newspaper (the Harbus) back on July 7, 1997.

The Financial Future of Harvard is in HBS Hands

"Harvard Management Company is the only first-class investment institution owned by a nonprofit." Bold words from Jack Meyer, MBA 1969, President of Harvard Management Company, but perhaps justified by impressive investment performance.

Harvard has the largest endowment of any private university in the USA: $9.4 billion. Harvard Management Company (HMC) is a wholly owned subsidiary of Harvard University, founded in 1974 to manage the University’s endowment, pension assets, working capital, and deferred giving accounts. A Board of Directors, appointed by the President and Fellows of the University, governs HMC and its 160-person staff. The Board is comprised of professional financiers, including HBS Finance Professor Jay Light and Goldman Sachs partner Eric Mindich. HMC manages a total of $11.7 billion, including Harvard’s pension accounts, gift annuities, and other non-endowment funds.

A Day in the Life of Jack Meyer

Mr. Meyer, 52, graduated from HBS in 1969 as the youngest member of his class. His was the first HBS class to stop wearing a coat and tie. After graduation, he spent three years with Brown Brother Harriman. Since 1979, Mr. Meyer has specialized in managing money for nonprofits. Prior to HMC, he was Treasurer and Chief Investment Officer of the Rockefeller Foundation ($2B endowment). Before Rockefeller he was Deputy Controller of New York City, where he managed $20B. He lives in Cambridge with his wife and two children.

In a wide-ranging interview, Meyer said that the most important parts of his job are "to find the right people, motivate them properly, and maintain the HMC culture." Less important than the people tasks, he is responsible for tactical asset allocation, which generally does not fluctuate widely.

Meyer commented that, every year, it becomes harder to attract and retain top investment talent, both portfolio managers and back office staff. In a competitive marketplace, many employees are attracted to HMC’s Boston location. Many of his team are also attracted to the strictly defined HMC compensation system. According to Meyer, employees at many money management firms are compensated based in part on ambiguous criteria, such as how much the President likes the employee. At HMC, Meyer says that the compensation system is unambiguously pay-for-performance.

Meyer observed that HMC is not large enough to train people, so he focuses on recruiting people with significant asset management experience. HMC does not typically hire new MBAs.

Controversial Issue: Compensation

By far the most controversial issue involving HMC is management compensation. HMC’s compensation data is available in its federal tax filing. Fiscal 1996 compensation for the 160-person HMC staff tripled to $57 million, up from $16 million in 1995. The top ten highest paid people at Harvard are all HMC employees. Jonathan S. Jacobson, a domestic equity manager, earned $4.7 million in 1996. Meyer earned $897,523, a 25% drop from $1.2 million in 1995.

By comparison, Harvard’s top professors can earn $176,000 (excluding outside income, such as consulting fees). Because HMC managers earn so much more than President Rudenstine, or even HBS professors, they receive some uncomfortable publicity every fiscal year. Mr. Meyer commented that this publicity is by far the least enjoyable aspect of his job. The Boston Globe‘s observation was that the high salaries "have created considerable angst within the Harvard community."

The HMC Board compensates Meyer and his staff based on their performance against the Policy Portfolio. As Meyer observed, other universities are also paying large salaries to money managers. The key difference is that high-paid people like Mr. Jacobson work directly for Harvard, so their salaries are public knowledge. A million-dollar-a-year manager at Fidelity may be managing money for Princeton, but her salary does not appear in Princeton filings because that endowment is primarily externally managed.

Meyer must balance a fundamental tension between the University’s very long-term perspective and the short-term perspective of most money managers. In order to align the interests of the managers and the University, compensation is split into a small base salary and an incentive bonus, based on performance relative to benchmark. This bonus can be either positive or negative.

When a manager earns a significant bonus, the bonus is held in escrow for up to 3 years and subject to "clawback". When returns are below benchmark, the manager’s bonus is docked from the money held in escrow. Certain managers have earned negative compensation in some years, as a result of this structure. Meyer’s primary goal: to prevent a manager from earning excess return by taking excessive short-term risk.

Whether it is the compensation system or Meyer’s management skills, the performance numbers indicate that HMC is doing very well.

Impressive Performance

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*Extensive use of futures causes cash to appear as a negative percentage of total asset value.

The HMC portfolio is diversified across both asset class and industry. HMC’s target portfolio includes a higher allocation to foreign securities and commodities and a lower allocation to domestic fixed-income assets than the typical institutional fund. The fund holds roughly 5,000 different securities.

In the past five years, each asset class has outperformed its benchmark, with the exception of commodities and private equity investments. Among 82 comparable large funds, Harvard ranked #2 behind Yale (which manages 90% of its money externally). Meyer observed, "No other investment manager tries aggressively (and successfully) to add value across as broad an array of asset classes as HMC." In the past five years, since Mr. Meyer joined Harvard in September 1990, the endowment has returned 16.1% annualized after fees. An appropriate comparison for total HMC performance is the performance of comparable large trusts. The "Trust Universe Comparison Service" median total return for Master Trust Funds was 11.1%.

For Fiscal 1996 (which ended June 30), the Endowment outperformed the Policy Portfolio by 3.7%. Approximately 0.3% of that 3.7% was due to successful tactical asset allocation decisions (under or over weighting asset classes). The remaining 3.4% was due to outperformance within asset classes.

Harvard is unique among major universities in managing 88% of its endowment internally. Most major universities externally manage close to 90-100% of their endowment. According to Harvard President Neil Rudenstine, HMC manages money for substantially less than Harvard would have to pay outside managers.

Meyer’s goal is to keep pace with or outperform the growth in university expenses each year. HMC disburses 4.5%-5.0% of the fund’s capital value each year. Those disbursements accounted for 24% of the University’s 1996 revenues.

When HBS or any other Harvard department receives an alumni donation, it has two options: either it can invest in a money market fund for working capital purposes, or it can invest with HMC. The primary rationale for this aggregation of funds is that HMC achieves economies of scale by working with the funds of all the Harvard departments combined. As of June 30, 1996, HBS had an endowment of $571 M, ranking it third among all Harvard departments, after the Faculty of Arts and Sciences ($3.8 B) and the Medical School ($1.0B).

Investment Philosophy

In maximizing returns, Meyer takes full advantage of Harvard’s unique position. The University’s credit is rated AAA, because of its highly liquid endowment and well-diversified sources of income (grants, tuition, endowment, and business operations such as the HBS Publishing Corporation.)

The endowment’s large size facilitates hedged transactions. As a nonprofit, HMC only has to pay trading fees, not capital gains taxes. In most cases, HMC can reclaim any withholding tax deducted on dividend payments. Whether the school receives money as a capital gain or as income is irrelevant.

Unlike many institutional investors, Harvard’s long-term perspective allows it to invest in illiquid, volatile investments, such as venture capital funds and emerging market shares and bonds. Many private equity investors enjoy having Harvard as part of a syndicate, because of the school’s prestige.

Lastly, HMC can put money into an extremely broad range of deals, because of its flexibility in both capital type and size. One limitation: HMC generally does not pursue transactions that are subject to high start-up, technology, or exploration risk.

Meyer focuses on finding market anomalies and taking large, hedged, leveraged bets on them. A comparable for-profit fund could not trade as frequently as does HMC, because it would have to pay capital gains taxes on every profitable transaction.

A classic arbitrage maneuver typical for HMC: it buys a Japanese bond that looks undervalued relative to the bond’s futures, and simultane
ously sells the futures. HMC’s expectation is that the two securities will converge in value; the bond will rise and the future will drop. T

Theoretically, this arrangement allows for zero market risk. Although HMC’s percentage profit may equal only one basis point, its dollar profit will be significant because HMC can invest such a large sum in the trade.

HMC is a highly sophisticated user of leverage and of the derivatives market. As of June 30, 1996, HMC was long $16.2 billion and short $14.5 billion in total fixed-income market exposure. By comparison, its fixed income balance sheet position in cash was long $7.5 billion and short only $0.6 billion.