By RACHEL ZIMMERMAN
Staff Reporter of THE WALL STREET JOURNAL
January 12, 2005; Page C1
Jack Meyer, overseer of Harvard University's
$22.6 billion investment portfolio, is leaving the school to start his own
firm, taking four of his best money managers with him.
Mr. Meyer's move after nearly 15 years at
Harvard underscores a dilemma facing colleges, which are under pressure to
build endowments by hiring top money managers -- who command premium pay --
while at the same time seeking to keep compensation under control and
internally palatable.
Mr. Meyer chalked up above-average returns as
president and chief executive officer of Harvard Management Co. But he faced
perennial criticism from some alumni and others about the big paychecks the
operation handed out. At the same time, many colleagues abandoned Harvard
during his tenure for the richer fields of private money management.
"It's time for a new chapter," Mr. Meyer said
in an interview. "It will be somewhat of a relief to drop out of the public
spotlight."
He added: "Harvard is a very visible fund.
It's no secret that every single year compensation is a thorny issue."
Verne Sedlacek, the chief executive of
CommonFund in Wilton, Conn., which selects outside managers for university
endowments, said Mr. Meyer's departure represents the end of an era. Few
universities can afford to pay the big paychecks demanded by top money
managers -- and the few that do, such as Harvard, end up getting criticized
for it, he said. As a result, most turn to outsiders for management. Mr.
Sedlacek, a former Harvard Management employee, called Mr. Meyer's
accomplishments "absolutely spectacular."
In the fiscal year ended June 2004, the two
top paid managers at Harvard Management, David Mittelman and Maurice
Samuels, each received about $25 million. In the prior year they earned more
than $35 million each. Both men will join Mr. Meyer at his new firm. Mr.
Meyer made $7.2 million last year.
Harvard's endowment, by far the richest of any
U.S. university, had a 21% investment gain in the year that ended in June
2004, when it stood at $22.6 billion. That compares with a median 17% growth
for the 25 largest university endowments, according to the school.
The multimillion-dollar pay levels rankled
university employees facing layoffs and alumni, who threatened to boycott
fund-raising campaigns. William Strauss, an author and Harvard alumnus who
lives in McLean, Va., said a group of 11 alumni from the class of 1969 are
drafting a new letter asking that the entire compensation process be
re-evaluated.
"Our basic point is the endowment should be
for the benefit of current and future students, not for the benefit of
current and future fund managers," Mr. Strauss said. "The bonuses that have
been paid to fund managers are unnecessary, inappropriate and contrary to
the values of a great university."
Mr. Strauss said he believes it would be wrong
for any portion of Harvard's endowment to be invested in Mr. Meyer's new
firm, a practice the university has followed with several other managers who
left to start their own funds.
Mr. Meyer, a 1969 graduate of Harvard Business
School and former chief investment officer of the Rockefeller Foundation,
defended the pay system, arguing that world-class managers must be paid top
dollar. He said his bond managers outperformed the bond-index benchmarks
against which they are measured. Harvard has said the endowment is $1
billion richer because of benchmark outperformance last year.
The university said Mr. Meyer decided on his
own to resign, leaving in about six months. The school added that it would
be open to alumni and other views about managing the endowment going
forward.
About 85% of Harvard's assets were once
managed internally, but the percentage shrank to 50% under Mr. Meyer. "With
Jack and his colleagues leaving, I guess it will drop lower than that,"
Harvard treasurer James Rothenberg said, although he said no decision had
been made about hiring the new firm.
"We think we have gotten excellent results
from the compensation we've paid," Mr. Rothenberg said. A committee seeking
Mr. Meyer's successor, he added, would deal with questions about
compensation as well as a range of other issues, including whether the
in-house system that Harvard has used to manage its endowment should
continue.
Only a handful of the 45 academic institutions
with endowments over $1 billion have an in-house system of money managing
like Harvard, according to Damon Manetta with the National Association of
College and University Business Officers.
Under Harvard Management's current pay system,
managers earn contingent bonuses based on each year's performance, but
payouts are calculated from performance over several years. Harvard said its
top six managers earned contingent bonuses totaling $61.5 million in fiscal
2004, but all received higher cash payouts based on their performance in
prior years.
In addition to Mr. Mittelman, manager of
Harvard's domestic-bond portfolio, and Mr. Samuels, who runs Harvard's
foreign-bond investments, two other managers, Edward DeNoble, manager of
emerging-market bonds, and Michael Pradko, chief risk officer, will join Mr.
Meyer at the new fund.
Louis Morrell, vice president for investments
and treasurer at Wake Forest University in Winston-Salem, N.C., said
multimillion-dollar pay packages for in-house managers inevitably anger
parents, students and staff. "It's my conviction personally" that such high
pay for money managers "is not acceptable in higher education. The culture
doesn't support it."
Wake Forest uses outside managers for its $900
million endowment, which returned 17% in the year ended June 30. Mr.
Morrell, whose annual salary is $240,000, said the university paid about
$4.5 million in fees to the managers.
