Harvard Management Company

In: Business and Management

Submitted By beichmann
Words 711
Pages 3
Harvard Management Company (HMC) has successfully managed Harvard University’s endowment over the last decades. The active management has added billions of dollars in value; nevertheless, CEO Jane Mendillo wants to evaluate the allocation of the portfolio before the next board meeting, looking at liquidity, risk profile, and type of management. HMC’s main objective is to preserve the real value of the endowment and its income distribution in perpetuity. In order to do this, they require annual real returns around 5.5%. The endowment has grown tremendously over the past 30 years; however at the same time, so has the endowment spending. The key question in this case is whether HMC has an appropriate method for investing and developing the endowment, considering their objectives and the University needs. Liquidity and risk is essential to HMC, and by increasing internal management of the endowment, liquidity will increase and risk might decrease. HMC should also consider reducing their dependence on U.S.-based assets. Harvard’s reliance on the endowment is increasing; between 1980 and 2009, Harvard’s endowment spending, as a percentage of the total budget, increased from 15% to 38%. Mendillo is concerned that HMC is largely exposed to illiquid assets (2009: 60% requires more than one year to liquidate), while these assets no longer offer meaningful excess returns. This might indicate that HMC should shift some investment focus, in order to include more liquid assets; also, Mendillo argues for a Liquidity Benchmark to be able to take advantage of investment opportunities arising in volatile markets. However, looking at the Policy Portfolio of fiscal 2010 we see a policy of 2% in cash, and around 35% somewhat liquid assets (domestic equities, foreign equities, and fixed income). In addition, we should note that even with a low cash/liquidity allocation, the investments…...

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