Investment Manager to Exit Endowment at Harvard

By STEPHANIE STROM
Published: January 12, 2005

The investment manager who helped propel Harvard University's endowment into a league of its own said yesterday that he was leaving to start his own firm, emboldening critics who have complained that he doled out pay that was high even by Wall Street standards.

The manager, Jack R. Meyer, who took over a $5 billion endowment at the university in 1990 and parlayed it into $23 billion, will leave this summer. His exit may sound the death knell for Harvard's unorthodox investment management model, under which Mr. Meyer has effectively run a hedge fund, the Harvard Management Company, which is also a nonprofit organization.

While Harvard begins a search for a replacement, it will be pressed to consider bigger changes in how it manages money.

"This is a natural moment to reflect on aspects of the distinctive investment model that has greatly benefited the university over the years," James F. Rothenberg, president of the Capital Research and Management Company and treasurer of Harvard, wrote in a letter to alumni.

William Strauss, an author and playwright, is part of an 11-member group from the Class of 1969 that has criticized compensation practices and would like a broader discussion. "They are organizing a steering committee to look at the issues," Mr. Strauss said, "and we would like it to include at least one person who does not come from Harvard or the financial community to assess whether all objections and opinions are fairly considered."

The handsome returns produced under the existing model - Harvard has routinely outperformed the vast majority of its university peers as well as hedge funds and asset management companies - have been overshadowed in recent years by controversy over how much the university has paid its money managers.

In the year that ended last June 30, Harvard's endowment grew 21.1 percent, and it paid its top money managers a total of $78.4 million. The largest share went to David R. Mittelman, who manages roughly $2.4 billion of domestic bonds, and Maurice Samuels, who manages about $1.4 billion in foreign bonds. Mr. Mittelman and Mr. Samuels will be joining Mr. Meyer in the new firm. Mr. Meyer, who made $7.2 million last year, has also recruited Edward DeNoble, who manages a portfolio of emerging market debt, and Michael Pradko, Harvard Management's chief risk officer.

Several alumni have asked how the university can justify raising tuition when its endowment is so large and when it pays its managers so much. Public scrutiny of compensation practices among nonprofit organizations is also on the rise, with the Internal Revenue Service asking some to justify what they pay senior employees.

In a telephone interview, Mr. Meyer said the criticism was a reason, although not the primary one, that he was leaving.

"It would be disingenuous to say that I wouldn't mind dropping a little bit out of the public spotlight," he said. "Things at Harvard do get a lot of attention, and the annual compensation story is not one I will miss."

He said he mostly wanted the opportunity to pursue another career in the private sector, away from the world of nonprofits. Mr. Meyer served as chief investment officer at the Rockefeller Foundation before joining Harvard and before that was deputy controller of New York City.

"I think I have one more good chapter left in me, and now is the time for it," he said.

Harvard has long contended that it pays the going rate for money managers who produce superior returns and that assigning more of its endowment management to outside firms would be more expensive.

But few universities have adopted its approach, and even Harvard Management now entrusts roughly half its assets with outside firms. Yale University, which has the next biggest endowment, $13 billion, places the majority of its money with outside firms and has sometimes done better than Harvard Management.

The University of Texas spun off its investment management operation into a separate entity in 1996, but has stopped short of adopting compensation practices similar to Harvard's.

Under a raise adopted by the University of Texas Board of Regents in September, Bob Boldt, chief executive of the University of Texas Investment Management Company, could make almost $900,000 in the fiscal year that will end Aug. 31. The previous year, Mr. Boldt was paid $698,000, which pales next to what Mr. Meyer was paid at Harvard.

Louis R. Morrell, chief investment officer at Wake Forest University, said the model that so closely mirrors Wall Street compensation simply did not work in a university setting.

"The culture of the higher-education community has never accepted compensation on that basis and will never accept it, I think, irrespective of whether Harvard continues its practices or not," Mr. Morrell said.

Harvard has named a committee that will oversee Harvard Management during the transition, search for a replacement for Mr. Meyer and ponder more broadly how to position the university's money management operations for the future. The committee includes Mr. Rothenberg; Harvard's president, Lawrence H. Summers; Robert E. Rubin, the former Treasury secretary; and Steven Heller, an investment banker. It has invited comments in writing at hmcsearch@harvard.edu.

Since 1998, several Harvard Management's star money managers have left to start their own firms, taking the portfolios they were managing with them as well as adding other assets. In exchange, Harvard often gets a share of their profits, which may lower or even offset the fees it pays them.

Mr. Meyer would not say whether his new firm would have a similar arrangement or would manage any of Harvard's money. Some other investors and endowment overseers may be wary of committing money to Mr. Meyer's firm if they think Harvard has a special arrangement with it.

Stanley H. Eleff, a critic and a 1969 graduate, said he would press Harvard for an answer.