Harvard's high-paid star investor leaving
By Charles Stein, Globe Staff
January 12, 2005

Jack Meyer, who produced stellar investment results for Harvard's endowment but faced criticism for the multimillion-dollar paychecks he and his money managers earned, said yesterday he and some of his employees were leaving to start a private investment firm.

In the nearly 15 years Meyer was president of Harvard Management, the university's money management arm, the endowment grew from $4.7 billion to $22.6 billion. Over the past decade only two major universities -- Yale and Duke -- earned higher returns.

"Jack was one of the greatest assets Harvard had," said Tim Peterson, president of Regiment Capital, a Boston investment firm that manages some of Harvard's money.

But Meyer made as much news for his disputed compensation policies as for his investment prowess. Because Harvard manages a significant portion of its money internally -- a rarity among universities -- Meyer insisted he had to pay his investment managers the kind of salaries they could earn in the private sector. Two years ago, Harvard's top two managers made $35 million each. Meyer himself earned $7.2 million last year.

A small but vocal group of alumni complained that such outsized paychecks were inappropriate in a university setting. "The endowment should be managed for the benefit of its students, not its fund managers," said William Strauss, a member of the Harvard class of 1969 who has been active in the protest.

Harvard officials yesterday denied that the pay issue has anything to do with Meyer's departure. "There has been no change in the compensation policy at all," said James Rothenberg, Harvard's treasurer. Both Rothenberg and Harvard President Lawrence Summers praised Meyer for his contribution to the university.

Rothenberg will lead a committee to find Meyer's successor. The same committee will look at whether it still makes sense for Harvard to continue its longstanding tradition of managing some of its own money, or whether it would be preferable to give the money to outside managers. "This is a natural moment to reflect on aspects of the distinctive investment model that has greatly benefited the university over the years," said Rothenberg in a letter to alumni disclosing the news.

Among the members of Rothenberg's committee will be Summers and Robert Rubin, who like Summers served as Treasury secretary in the Clinton administration.

Meyer yesterday said he was leaving, in part, because it was time for him to do something new. But he conceded the public attention he received at Harvard -- both for his investment returns and his pay policies -- was not always welcome. "It will be nice to drop out of the public spotlight a bit," he said. Meyer often complained that the publicity about the high salaries was a distraction for Harvard. The publicity also made it more difficult for the endowment to retain top-flight managers, Meyer argued. In the private sector, compensation is generally kept quiet.

Meyer will stay at Harvard at least through June 30, the end of the fiscal year. He declined to say what exactly his new firm will do. But he did add that he will be joined by four other Harvard Management employees, including the endowment's top two bond managers, David Mittelman and Maurice Samuels. The pair earned roughly $35 million each two years ago and $25 million each last year.

In the past, Harvard has continued to invest with star money managers when they left the university to start their own firms. Rothenberg said it was too soon to say whether Harvard would give a slice of the endowment to Meyer's fledgling company, but he said, "That would certainly be a possibility."

When Meyer took over at Harvard in 1990, the university had what was considered a team of brilliant money managers, but its results were uneven and unspectacular. "We had no real discipline," said a money manager who was there then.

Meyer changed that in a number of ways. A big fan of diversification, Meyer pushed Harvard to invest in everything from foreign stocks to real estate to timber. In the bear market of 2001 and 2002, that diversification away from stocks allowed Harvard to outperform most of its peers.

Meyer also pushed his money managers to focus on adding value by doing better than an index fund would do. "This business is a giant scam," he said, several months ago in an interview. "Roughly 85 percent of investment managers don't add value. Those who can are rare." For Meyer, adding value meant a manager should concentrate on his strength -- such as stock picking -- rather than try to time the stock market or predict the future of interest rates.

The compensation policy was another Meyer creation, and he was very proud of it. "It is superior to any system I have ever seen," he once said. The heart of the system was pay for performance. A money manager could be awarded huge sums if he outperformed his benchmark, a comparable index fund. But he would be given only a portion of that award immediately. The rest would remain in a compensation account and could be taken away if his performance tailed off the following year. By withholding some compensation each year, the system was designed to reward success while discouraging excessive risk-taking in any given year.

Meyer argued that he was competing for talent with hedge funds, investment vehicles open to wealthy individuals. According to Alpha, a magazine that tracks the hedge-fund business, the nation's top 25 hedge fund managers last year earned an average of $200 million each. In recent years some of Harvard Management's top investors left to start their own hedge funds. As Meyer put it, "Did they leave because we paid them too much?"