Natural resources disappoint at Harvard endowment

The $36bn fund reported strong private equity returns after implementing an ‘aggressive’ restructuring plan in December 2016.

Harvard Management Company, which oversees the university $35.7 billion endowment, has said it is disappointed by its annual returns despite a ‘strong’ performance in private equity.

The endowment generated an 8.1 percent return for the fiscal year ended 30 June 2017, up from a 2 percent loss the previous year, according to a letter from N.P. Narvekar, chief executive of HMC. The growth reflected strong performances across the endowment’s public equity, private equity and direct real estate platform, according to the letter, although HMC did not comment on the specific performance of its private equity portfolio.

The fund reported a challenging year for its natural resources investments. “Our performance is disappointing and not where it needs to be,” Narvekar noted.

“Indeed, the opportunity to improve this is what attracted me to the leadership role of Harvard Management Company. The endowment’s returns are a symptom of deep structural problems at HMC and the resultant significant issues in the portfolio.”

HMC had an allocation of 10 percent to natural resources as of September 2016, according to its 2016 annual report. Private equity holdings, which represent 16.7 percent of the endowment’s portfolio, generated a 2.6 percent return for the fiscal year ended 30 June 2016, above its 2.2 percent benchmark.

Narvekar’s overall disappointment comes despite an “aggressive plan to restructure HMC and create the necessary organizational and investment culture” since joining in December, the letter stated. The chief executive’s efforts have included establishing a new generalist investment model, recruiting new senior investment team members and creating a new risk framework.

“Our primary focus has now shifted to having the generalist investment team gain a collective understanding of the entire portfolio,” Narvekar added. The previous focus on individual asset classes created an overemphasis on individual benchmarks and occasional gaps in the portfolio, he noted.

“As we [adopt this model], we will gain proficiency in our new processes and continue to develop the analytics which support them. At the same time, we will make portfolio moves accordingly.”

HMC executed secondaries sales in private equity and real estate this year that generated “significant liquidity” for the endowment. In April, the manager sold $2 billion of real estate assets to Landmark Partners and Metropolitan Real Estate Equity Management in a bid to reduce its exposure to the asset class, sister publication Secondaries Investor reported.