After ten years of lagging investment returns, Harvard University’s massive $35.7 billion endowment is poised to cut its current staff of 230 in half by the end of 2017, according to unnamed sources who spoke to the Wall Street Journal. The new head of the Harvard Management Company, the entity in charge of the endowment, reportedly has determined that most of the fund should be outsourced to independent money managers. (See also: Harvard’s Luster Is Tarnished By Rate Swaps.)

Back of the Class

For the 10 years ending June 30, 2016, Harvard’s endowment had an average annual total return of 5.7%, the second lowest among the eight Ivy League universities, according to the January 25 article in the Journal. At the head of the Ivy League class were Princeton, Columbia and Yale, all of whose endowments enjoyed returns in excess of 8%.

In fact, Harvard also lagged the total return on the S&P 500 Index (SPX) during the same period, per data presented by the Journal. Since the endowment now funds about 33% of the university’s operating expenses, maximizing its returns and avoiding withdrawals of principal are of paramount importance. A longer-term strategic question not addressed by the Journal is whether Harvard should put more of its funds in low-cost passive investment vehicles. (See also: Passive Funds are Killing Active Money Managers. )

Who Stays, Who Goes

Many rival institutions, such as Yale, entrust nearly all their investments to outside money managers, the Journal notes. Harvard, by contrast, has a long history of preferring to use in-house managers organized under the Harvard Management Company.

Harvard will spin-off its direct real estate investment team into an independent entity, but will keep those investments with these same managers, the Journal says. It also will shut down its internal hedge funds. Only management of a natural resources portfolio and monitoring of investments in passively managed ETFs​ will remain in-house.

The Politics of Pay

During the 1991-2005 tenure of Jack R. Meyer as head of the Harvard Management Company, the university’s endowment nearly quintupled, surging from $4.7 billion to $22.6 billion, according to a Forbes article covering his departure. In line with what they would have earned at hedge funds, annual individual performance-based bonuses for Harvard’s money managers during this period went as high as $35 million. This sparked heated protests from students, faculty and alumni, which led to caps on pay and a steady departure of top money managers, eventually including Meyer himself.

Many of these former employees continued to manage their old portfolios, outsourced by Harvard to the new firms that they founded. As a result, the proportion of Harvard endowment assets entrusted to outside managers jumped from about 20% to 50% on Meyer’s watch, Forbes reported. The recent Journal article observes that the effect of the pay caps lingers, making Harvard uncompetitive with hedge funds in the war for investment talent.

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