For Meyer and Friends, A Good Year at Last

Like a battle-scarred prizefighter on the ropes in the title match, Harvard's endowment is struggling. Long the envy of higher education for its size--at nearly $5.5 billion, it is the heaviest of the heavyweights--the fund and its managers have more recently become a punching bag for critics after years of lackluster returns.

But the final bell hasn't sounded. And even with some alumni and faculty ready to throw in the towel, Harvard's money men may have a few strong jabs left.

Earnings for the last fiscal year, which ended in June, have not yet been announced, though insiders say Harvard's investments had a great year. The reason? A heavy stake in foreign stocks, which currently amount to more than 18 percent of the University's holdings.

Those stocks, which haven't done much since 1990--when Harvard dramatically increased its stake in overseas markets--have taken off in recent months, far outpacing Wall Street. The result could be a gold mine for the University.

Given recent history, that would be welcome, albeit surprising, news. In 1992, the endowment returned a disappointing 11.8 percent, lagging behind 71 percent of the nation's colleges and universities. And in 1991, Harvard's nest egg barely grew at all.

Beyond the pain of knowing that millions of dollars were slipping through the University's fingertips, Harvard has been faced with an embarassing, and very public spectacle.

Prominent alumni, including Wall Street veterans and several of Harvard's most important benefactors, have blasted the endowment's handlers in the press. In January, shortly after the latest results made headlines, Harvard Management Company (HMC) President Jack R. Meyer, the endowment's chief administrator, was called before an impatient Faculty Council to explain his performance.

The erosion of confidence in the University's ability to manage its money couldn't have come at a worse possible time--just as Harvard prepares to announce the largest fundraising campaign in the history of higher education. And it has caused serious headaches for administrators, including Meyer himself.

The HMC president has reportedly confided to friends his frustration with all the bad press, including annual disclosures of the hefty, six and seven-figure salaries paid him and other top HMC officials. Meyer did not return repeated phone calls requesting comment for this article.

Furthermore, Meyer's superiors may not havedealt with HMC's problems because they felt theirhands were tied. While some critics have blamedHMC's problems on its very structure--in-housemoney management is rare amonguniversities--observers suggest that theUniversity hasn't disbanded the two decade-oldinstitution because it can't without lookingfoolish for creating it in the first place.

And Harvard administrators can't really blameMeyer for all the trouble, either, since he onlyassumed his post in September 1990 (hispredecessor, HMC founder Walter M. Cabot '55,reportedly was eased out the door after returnsdeclined steadily since the mid-1980s).

Still, if fiscal 1993 really does represent thestart of a sustainable turnaround, drastic stepsmay not be necessary. Indeed, for Meyer, this yearcould possibly bring the vindication of a strategyhe implemented upon arriving at Harvard threeyears ago.

Then, the University was heavily invested insafe, but uninspiring domestic bonds, andunderweighted in foreign stocks, which took off inthe mid-1980s. Within nine months, Meyer reversedthat policy. By the close of fiscal 1991,Harvard's stake in U.S. bonds had been pared downby more than $500 million from a high of $1.3billion. Meanwhile, foreign stock holdings swelledby nearly $600 million, to $861 million.

But the dramatic shift came too late tojumpstart HMC's lagging returns--just as foreignstocks started to level off. In fiscal 1992,Harvard earned a paltry 1.3 percent on its foreignequity holdings, compared to 14.4 percent on U.S.stocks. Meanwhile, Harvard's holdings in thespeculative real estate and commodities sectors,staked out in the early 1980s under Cabot, werepummeled, the victim of depressed markets and poorinvestment choices.

Finally, in late fiscal 1993, foreign stockprices resumed their strong climb. For the year,the benchmark Morgan Stanley EAFE-Free Index,which measures foreign equity performance,returned 18.25 percent, nearly seven points higherthan the Standard & Poor's 500 index of domesticstocks.

Today, well into fiscal 1994, the news fromoverseas continues to be good, thanks in largepart to the performance of Japanese markets, saysJay O. Light, Baker professor of businessadministration at the Business School. "TheJapanese stock market has gone up a lot and theyen has gone up a lot relative to the dollar,"says Light, who sits on the management company'sboard of directors.

And while Harvard probably won't release itsown, official performance figures until at leastthe end of this month, Light says the year provedto be "just excellent" for the endowment.

Still, even with the strengthened returns, theroad ahead is not likely to be entirely smooth orwithout peril for the University's money. AsHarvard officials are quick to point out, thereare no guarantees that foreign stocks willcontinue to do well.

"Things have a way of averaging out," saysLight. "I have no personal forecast about theshort-run."

In addition, a growing number of Wall Streetanalysts are predicting an imminent and sizablecorrection in the domestic stock market.

"The specter of 1987 haunts one," saysPresident Neil L. Rudenstine, referring to theinfamous Black Monday crash that sent the U.S.market reeling by nearly 23 percent on October19th of that year. Unlike many investors, Harvardunder Cabot weathered Black Monday quite well, asdid the New York-based Rockefeller Foundation,then under Meyer's financial leadership.

"Still, the idea of a [sudden drop] is less thespecter now than a rather steady erosion,"Rudenstine says. "One might not have that one,absolutely critical day, but rather severalcritical days."

And stocks aren't the only concern. In the lastseveral months alone, a series of stumbles in theendowment's private placement portfolio--long atarget of HMC's most spirited critics--have costHarvard tens of millions of dollars.

In March, for example, the University's $113million investment in a pair of Crystal City, Va.,office buildings was placed in serious jeopardywhen the U.S. Navy, the buildings' major tenant,announced plans to move within the next severalyears.

Meyer said at the time that the Navy'sdeparture would not necessarily hurt Harvard andcould even prove profitable over the long term,should new tenants lease the space at higherrates. But local government and business officialsgreeted that appraisal with skepticism, and HMCwas reported to have petitioned the Navy toreconsider the move.

In April, Hampshire Instruments, a NewYork-based high technology firm dealing withsemiconductors and heavily bankrolled by Harvard'sendowment, shut its doors after a drawn-outstruggle for survival. According to severalsources knowledgeable about the investment, theUniversity's loss amounted to at least $24million, and quite possibly $40 million. Whiledeclining to release their own numbers, HMCofficials have disputed those estimates, and havedenied that it would have a "significant impact"on the endowment.

And over the summer, Harvard and three otherinvestors filed suit against the MarriottCorporation, hoping to block the company's splitinto a healthy hotel operation and a debt-ladenreal estate division. The University claimed itsnearly $34 million investment in Marriott woulddiminish in value substantially as a result of thesplit.

But Harvard's argument was challenged by aDelaware Chancery Court judge, who called it"dark" and "Machiavellian." The Universityeventually settled its feud with Marriott and thecompany's breakup went ahead as planned.

Precisely because of such periodic, and veryvisible flops, however, and given the endowment'sunimpressive track record over the last severalyears, Meyer and other Harvard officials areunlikely to make much fanfare over the improvedresults of fiscal 1993.

Rather, as some are already doing even beforethe exact numbers are announced, officials maypoint to the higher returns as evidence of two ofthe University's standard refrains: first, thatthere are no inherent problems in the managementcompany's structure, and second, that theendowment's diversified asset allocation is thebest strategy over the long term.

Says Light, "The longer the time horizon, themore confident I am that we have a sensible assetallocation."

Ironically, that cautious tone is echoed bysome of HMC's most diehard critics. Says oneformer management company official, who asked notto be named, "You can't demonize them for one badyear, nor can you deify them for one good year."Crimson File PhotoJACK R. MEYER

Furthermore, Meyer's superiors may not havedealt with HMC's problems because they felt theirhands were tied. While some critics have blamedHMC's problems on its very structure--in-housemoney management is rare amonguniversities--observers suggest that theUniversity hasn't disbanded the two decade-oldinstitution because it can't without lookingfoolish for creating it in the first place.

And Harvard administrators can't really blameMeyer for all the trouble, either, since he onlyassumed his post in September 1990 (hispredecessor, HMC founder Walter M. Cabot '55,reportedly was eased out the door after returnsdeclined steadily since the mid-1980s).

Still, if fiscal 1993 really does represent thestart of a sustainable turnaround, drastic stepsmay not be necessary. Indeed, for Meyer, this yearcould possibly bring the vindication of a strategyhe implemented upon arriving at Harvard threeyears ago.

Then, the University was heavily invested insafe, but uninspiring domestic bonds, andunderweighted in foreign stocks, which took off inthe mid-1980s. Within nine months, Meyer reversedthat policy. By the close of fiscal 1991,Harvard's stake in U.S. bonds had been pared downby more than $500 million from a high of $1.3billion. Meanwhile, foreign stock holdings swelledby nearly $600 million, to $861 million.

But the dramatic shift came too late tojumpstart HMC's lagging returns--just as foreignstocks started to level off. In fiscal 1992,Harvard earned a paltry 1.3 percent on its foreignequity holdings, compared to 14.4 percent on U.S.stocks. Meanwhile, Harvard's holdings in thespeculative real estate and commodities sectors,staked out in the early 1980s under Cabot, werepummeled, the victim of depressed markets and poorinvestment choices.

Finally, in late fiscal 1993, foreign stockprices resumed their strong climb. For the year,the benchmark Morgan Stanley EAFE-Free Index,which measures foreign equity performance,returned 18.25 percent, nearly seven points higherthan the Standard & Poor's 500 index of domesticstocks.

Today, well into fiscal 1994, the news fromoverseas continues to be good, thanks in largepart to the performance of Japanese markets, saysJay O. Light, Baker professor of businessadministration at the Business School. "TheJapanese stock market has gone up a lot and theyen has gone up a lot relative to the dollar,"says Light, who sits on the management company'sboard of directors.

And while Harvard probably won't release itsown, official performance figures until at leastthe end of this month, Light says the year provedto be "just excellent" for the endowment.

Still, even with the strengthened returns, theroad ahead is not likely to be entirely smooth orwithout peril for the University's money. AsHarvard officials are quick to point out, thereare no guarantees that foreign stocks willcontinue to do well.

"Things have a way of averaging out," saysLight. "I have no personal forecast about theshort-run."

In addition, a growing number of Wall Streetanalysts are predicting an imminent and sizablecorrection in the domestic stock market.

"The specter of 1987 haunts one," saysPresident Neil L. Rudenstine, referring to theinfamous Black Monday crash that sent the U.S.market reeling by nearly 23 percent on October19th of that year. Unlike many investors, Harvardunder Cabot weathered Black Monday quite well, asdid the New York-based Rockefeller Foundation,then under Meyer's financial leadership.

"Still, the idea of a [sudden drop] is less thespecter now than a rather steady erosion,"Rudenstine says. "One might not have that one,absolutely critical day, but rather severalcritical days."

And stocks aren't the only concern. In the lastseveral months alone, a series of stumbles in theendowment's private placement portfolio--long atarget of HMC's most spirited critics--have costHarvard tens of millions of dollars.

In March, for example, the University's $113million investment in a pair of Crystal City, Va.,office buildings was placed in serious jeopardywhen the U.S. Navy, the buildings' major tenant,announced plans to move within the next severalyears.

Meyer said at the time that the Navy'sdeparture would not necessarily hurt Harvard andcould even prove profitable over the long term,should new tenants lease the space at higherrates. But local government and business officialsgreeted that appraisal with skepticism, and HMCwas reported to have petitioned the Navy toreconsider the move.

In April, Hampshire Instruments, a NewYork-based high technology firm dealing withsemiconductors and heavily bankrolled by Harvard'sendowment, shut its doors after a drawn-outstruggle for survival. According to severalsources knowledgeable about the investment, theUniversity's loss amounted to at least $24million, and quite possibly $40 million. Whiledeclining to release their own numbers, HMCofficials have disputed those estimates, and havedenied that it would have a "significant impact"on the endowment.

And over the summer, Harvard and three otherinvestors filed suit against the MarriottCorporation, hoping to block the company's splitinto a healthy hotel operation and a debt-ladenreal estate division. The University claimed itsnearly $34 million investment in Marriott woulddiminish in value substantially as a result of thesplit.

But Harvard's argument was challenged by aDelaware Chancery Court judge, who called it"dark" and "Machiavellian." The Universityeventually settled its feud with Marriott and thecompany's breakup went ahead as planned.

Precisely because of such periodic, and veryvisible flops, however, and given the endowment'sunimpressive track record over the last severalyears, Meyer and other Harvard officials areunlikely to make much fanfare over the improvedresults of fiscal 1993.

Rather, as some are already doing even beforethe exact numbers are announced, officials maypoint to the higher returns as evidence of two ofthe University's standard refrains: first, thatthere are no inherent problems in the managementcompany's structure, and second, that theendowment's diversified asset allocation is thebest strategy over the long term.

Says Light, "The longer the time horizon, themore confident I am that we have a sensible assetallocation."

Ironically, that cautious tone is echoed bysome of HMC's most diehard critics. Says oneformer management company official, who asked notto be named, "You can't demonize them for one badyear, nor can you deify them for one good year."Crimson File PhotoJACK R. MEYER