Despite Tough Year, New HMC Chief Remains Optimistic

For a woman whose shoulders bear the burden of steering higher education’s grandest endowment through the most debilitating financial crisis in a half-century, Jane L. Mendillo cuts a decidedly unassuming figure.

She speaks with measured confidence but betrays no ostentation. Her office, situated on the 16th floor of the Boston Federal Reserve Building, is adorned with little more than a few family photographs, three flat-panel monitors sitting atop her desk, and a comfortable view of Boston Harbor.

But beneath her unobtrusive exterior, Mendillo, CEO of Harvard Management Company, harbors a wealth of investment knowledge. She commands the respect of colleagues at Harvard and elsewhere, who laud her unceasing composure during a sudden and unanticipated financial meltdown, her decisiveness under time constraints, and her focus on long-term investment success.

“Truly, of all the people I’ve ever run across in the investment world, she was the most impressive,” says Andrew B. Evans, treasurer and vice president for finance at Wellesley College, where Mendillo managed the endowment for six years before she took over HMC’s executive position last summer. “Her ability to synthesize a huge collection of data and make it understandable to a lay audience, as well as a sophisticated audience, is remarkable.”

While she has been at Harvard in this position for less than a year—she took up the post on July 1, right before markets began plummeting—Mendillo has no shortage of experience managing the University’s endowment.

She spent 15 years at HMC working on nearly every asset class before embarking on her Wellesley hiatus, where she built the school’s investment office and re-engineered its portfolio.

“Wellesley’s in a very good position thanks to Jane’s work,” says Deborah F. Kuenstner, Wellesley’s current chief investment officer. “She’s very good at thinking about the endowment in a long-term context—not just [in] this quarter or this year.”

For much of her tenure at Harvard thus far, Mendillo has worked from dawn to dusk to not only salvage whatever returns remain in a dismal financial landscape, but also to take advantage of investment opportunities that may emerge as the storm calms in coming years.

With only a month to go until the end of the fiscal year, Mendillo says she is quite certain that the projection of a 30 percent drop in the endowment, originally formulated in October, will hold. But despite the drop, she says she is confident that her team will find ways to use the crisis to Harvard’s advantage.

“The time period in which we’re going to see improvement in the world economies, financial markets, and endowment performance is very much an unknown,” Mendillo says. “But we know that eventually things will improve, and the way we have the portfolio positioned—the set of strategies, the mix of investments—we know that we’ll benefit from that improvement.”

LURED TO FINANCE

Seated in her office beside HMC’s expansive main trading floor, Mendillo says that her current post represents “the pinnacle of the career path” that she has pursued for the past 25 years. But her early interests were not always tied to the esoteric world of university investment management that she has come to love.

Jane Lisa Mendillo was born in 1959 in New Britain, Conn. Her father served as an executive for a medical technology company while her mother stayed home to care for Mendillo and her two brothers and two sisters. She attended the local public school and was passionate about classical music—an avocation that she still pursues today—and participated in orchestra, band, choir, and school musicals.

Mendillo pursued her undergraduate studies at Yale, where she dabbled in writing for the Yale Daily News and earned a degree in English literature. But during her junior summer, she interned at the Yale Investment Office—an experience that she credits with piquing her interest in finance.

Ralph Earle III ’79, Mendillo’s husband whom she met in graduate school, says at one point she weighed the possibility of working toward a Ph.D. in English literature. But after being lured into the world of finance, Mendillo chose to pursue an MBA at the Yale School of Management and worked as a summer equities analyst on Wall Street, where she says she loved “delving into the details of earnings reports and economic cycles.” Though she spent a few years working in management consulting at Bain & Company in Boston, Mendillo decided she preferred the “excitement of investment management.” Eventually, she joined HMC’s internal equities management team, launching the career path she has followed ever since.

Earle, who now does consulting work in “green” technology, says he is still impressed by his wife’s ambition and unique commitment to her career.

“We started dating our second year of graduate school...and we said, ‘What do you want to be when you grow up?’ And she said she wanted to be a CIO of a major university,” Earle recalls. “I didn’t even know such a job existed.”

While HMC has had five different CEOs since 2005, Mendillo says that she has no intention of leaving Harvard anytime soon.

“This job will never get routine,” Mendillo says. “It’s very challenging, but it has a lot of inherent variety and intellectual interest.”

A SHORT HIATUS

In her early years at HMC, Mendillo gained experience investing nearly all of the endowment’s major asset classes. She also assembled the University’s pioneering timberland portfolio, which helps hedge risk from traditional equity investments. When Mendillo took the helm at HMC last summer, real assets—like timber, agricultural land, and real estate—comprised roughly a quarter of the then-$37 billion endowment.

Eventually, during these early years, she became vice president of external management, a post that had her overseeing investments in private equity, real estate, and emerging markets—a portfolio that grew to be worth $7 billion.

After having gained extensive experience and knowledge of portfolio management during her first decade and a half at HMC, Mendillo departed in 2002 to take the top investment job at Wellesley, where she managed the school’s billion-dollar endowment. There, she implemented an investment strategy similar to the one used at Harvard, diversifying asset exposure and repositioning the portfolio for stronger long-term performance.

But managing Wellesley’s assets likely never represented the full extent of Mendillo’s ambitions, and former Wellesley President Diana C. Walsh says she understood that Mendillo’s time was limited when they hired her. Nevertheless, she says the school is grateful for the work she did.

The portfolio Mendillo created for Wellesley saw annualized returns of 13.5 percent during her first five years in charge.

“I believe I was able to leave [Wellesley] in a much stronger position than what it was when I came in,” Mendillo says. “Wellesley gave me the top-down strategy background that I was looking for and it layered very well on the asset class specific experience I had at HMC.”

THE BEGINNING OF THE STORM

While her sojourn at Wellesley prepared her to take the helm of Harvard’s mammoth endowment, the company she returned to was dramatically different from the one she had left years earlier.

In 2005, HMC’s legendary CEO Jack R. Meyer left the company with 30 other employees in tow to start his own hedge fund after enduring heated criticism for what some saw as excessive company compensation. Meyer, a 15-year veteran of HMC, had grown the endowment from $4.7 billion to $26 billion, achieving an annualized average return rate of 15.9 percent over his last decade there.

He was succeeded by Mohamed A. El-Erian, an emerging markets bond expert and former economist for the International Monetary Fund, who rebuilt HMC’s internal infrastructure but stayed for only two years.

By the time she arrived, Mendillo was dealing with not only a new staff but also small glimpses of the crumbling financial landscape that would engulf her first year.

“When I started in July, I don’t think anyone could have foreseen the type of financial wind shear that lay ahead,” Mendillo says. “On July 3, the commodities market peaked after having been up 70 percent last year...and it went downward, pretty much in a straight line, to a negative 70 percent correction during the course of the fiscal year. That’s just one market.”

But even before she returned to Harvard, Mendillo had been meeting regularly for months with interim HMC CEO Robert Kaplan, a professor at Harvard Business School and a former vice chairman of Goldman Sachs, both to make the transition to HMC seamless and to prepare the portfolio for volatile market conditions triggered by the subprime mortgage crisis. Kaplan says HMC invested in tail-risk insurance and aimed to deleverage the portfolio.

While various media reports have called attention to Harvard’s attempts to sell large portions of its private equity portfolio at the height of the financial crisis, Kaplan notes that HMC had been preparing for such sales long before then, and that the outlook for the private equity market was already “decidedly cautious to negative” that summer.

But despite these hedging strategies, financial markets continued to deteriorate through the summer and ultimately imploded that fall.

On one mid-September Sunday evening, Mendillo went out to dinner with her husband to celebrate her fiftieth birthday, only to return home to multiple messages from her HMC team notifying her that they were formulating contingency plans for Lehman Brothers’ collapse—the largest bankruptcy in U.S. history and what many investors see as a seminal event in the financial crisis.

Stephen Blyth, who had only been promoted to his post as head of internal management at HMC the week before, says that Oct. 2008 was the most volatile month in the entire history of equity markets. While the markets were already ominous prior to Lehman’s collapse, he says the event exacerbated the crisis by triggering massive risk replacement for the many derivative contracts held by Lehman, increasing potential systemic risk in the markets, and instilling a general lack of investor confidence.

“We were well prepared, but we didn’t expect the Lehman failure, and obviously things were terribly difficult in the fall,” Kaplan says, noting that even a diversified portfolio cannot protect investors against simultaneous drops in nearly all asset classes. “The only precaution you could have had for that is not to be invested.”

By Oct. 31, the endowment had already dropped by 22 percent.

‘OPPORTUNITY FOR CHANGE’

Since then, Mendillo has made adjustments to both the portfolio allocation and the internal structure at HMC, although she and her colleagues all say that the long-term investment strategy and the internal-external hybrid structure utilized by the company will remain largely the same.

“She’s had no hesitation in deciding that during certain moments this past year we should no longer do certain things that we would normally have been able to do, in terms of deploying capital,” says Andrew G. Wiltshire, head of external management at HMC. But he adds that “it’s not like we’re throwing out the old model and bringing in a new one.”

For his part, Blyth says he is confident that his teams will outperform their market indices this fiscal year.

According to Mendillo, the portfolio deleveraging process initiated prior to her arrival had been “accelerated” during the course of the financial crisis, leaving HMC with a positive cash situation today—in contrast to the company’s historic negative 5 percent cash reserve. But she says that HMC is now aggressively analyzing ways to carefully reinvest that cash to take advantage of opportunities for significant returns and diversification over the next few years.

“The financial crisis has created the opportunity for change in a way that might not have existed if it hadn’t happened,” Mendillo says.

And while HMC announced in February that it would lay off roughly 50 staffers—part of Mendillo’s desire to “rebalance the company to better suit the portfolio I want to have going forward”—it is now actively looking to hire some top-notch internal traders as well.

A LEARNING EXPERIENCE

While she has tackled the financial crisis opportunistically thus far, Mendillo says the past year has also been a learning experience. Maintaining liquidity will be an extremely important consideration in the near future, she says, compared to the past decade when markets boomed. And while she does not think risk management techniques failed investors, she does say that HMC will look to augment and explore new risk strategies.

“If we don’t learn anything from this crisis, we really should be disappointed with ourselves,” she says.

Although the challenge of managing the nation’s most prestigious endowment continues to demand long hours, Mendillo still aims to find time for relaxation, often cooking with her husband and cherishing whatever time she can find with her two teenage children, who currently attend boarding school.

“I think one of her favorite things to do is to sit across from each other at the table with a nice meal, enjoying a glass of wine, and rehashing the events of the world’s day and our day,” says her husband, noting that they are particularly fond of Mediterranean cuisine.

Mendillo says she continues to find the day-to-day work of portfolio management exciting and energizing, and that she never ceases to be motivated by the educational mission of the University she works for—a sentiment shared by her husband as well.

“The single most valuable thing that we’ve been given is a great education...if you are a learned person, you have the opportunity and ability to contribute to society in a way that simply does not exist if you are not,” says her husband, explaining that Mendillo’s investment work broadens educational opportunities for a large array of people. “[Her job] is a great thing. She can really combine education with doing something that allows other people to be able to go to a place like Harvard or Yale.”

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.