HMC Analysts To Start New Investment Firm

Continuing a three-year-old trend, nine analysts from the Harvard Management Co. (HMC) announced earlier this month that they would leave HMC to start their own investment firm.

The members of the Select Equity Group, which manages nearly $5 billion in domestic equities for HMC, will leave this weekend to found Adage Capital Management.

Select Equity is widely considered to be one of HMC’s best team of investors in the 185-member firm, which handles all of the University’s endowment. Over the last decade, the portion of the portfolio overseen by Select Equity has outpaced the returns of the S&P 500 index by an average of 4 percent a year.

HMC President Jack E. Meyer said the split was “friendly,” and that the Select team will be sorely missed at the investment firm.

“I wish they wouldn’t leave,” he said. “It will be hard to replace that value added [to the endowment].”

Phil Gross and Robert Atchinson, the heads of the Select Equity team and two of HMC’s most senior analysts with 18 and 16 years experience at HMC respectively, will head up the new venture.

Gross, Atchinson and the other members of Select Equity are “terrific investors” and are considered “pioneers in the industry,” according to Jon Jacobson, a former HMC investor who left to found a hedge fund, Highfields Capital Mangement.

Members of the Select Equity Group referred inquiries about Adage to Chris M. Nahil, an associate at GPC/O’Neill consulting in Boston. Nahil declined further comment, saying Adage is still in the process of starting up.

The group will receive $1.8 billion in startup funds from the University, and it will also seek outside equity. Due to the Select Equity team’s track record, the new company should have no trouble attracting other investors—particularly other large institutions, HMC insiders said.

Due to Securities and Exchange Commission (SEC) rules former and current HMC investors could not speak for the record.

The scenario of talented and high-paid analysts leaving HMC is becoming all too familiar to HMC President Jack E. Meyer, who has seen three other investment firms spin off since 1998.

Although HMC managed about 85 to 90 percent of its funds when Meyer arrived in 1991, through the 1990s it has continually outsourced more funds.

According to Meyer, HMC will likely outsource about half of its investments within a decade, although it’s not part of a “conscious decision.”

“As people leave, if we think they’re good, we try to continue our relationship,” said University Treasurer D. Ronald Daniel.

In 1998, when Jacobson left to found Highfields HMC gave him $500 million in capital; likewise when the Harvard Private Capital Group spun off later that year with $1.8 billion in HMC funds to start Charlesbank.

Former HMC investors have cited a variety of reasons for leaving the firm: the chance to earn more money, the chance to start their own company and the added privacy of the private sector. HMC’s salaries are, for example, public record.

Several sources close to HMC said they were confident the firm could weather the latest defection without losing the great returns the endowment has seen in recent years—especially since Highfields and Charlesbank have done so well investing for the endowment.

Meyer noted that similar questions have been raised each time a group has spun off.

“I’m optimistic that we’ll get through this one too,” he said. “We have some tricks up our sleeve.”

—Staff writer Garrett M. Graff can be reached at ggraff@fas.harvard.edu.