Outperformance Pays

Superior performance in money management need not be absolutely positive. Modestly negative net returns on investments, like Harvard Management Company's -2.7 percent and -0.5 percent results on endowment funds in the past two fiscal years, left the University dramatically better off than if the assets had declined in line with the horrendous stock market (see "Steady State," November-December 2002, page 53). And so HMC's compensation system—which awards generous bonuses for managers' superior performance over time relative to market benchmarks, and penalizes them symmetrically for underperformance—again yielded large pay packages for a handful of investment professionals in the year ended last June 30. David Mittelman (fixed income) earned $17.5 million; Jeffrey Larson (foreign equity), $17.4 million; Maurice Samuels (foreign fixed income), $15.9 million; Steve Alperin (emerging-market equity), $12.1 million; and Tony Morgan (foreign equity), $6.3 million. (HMC president Jack R. Meyer, M.B.A. '69, earned $5.8 million.) During the past five fiscal years, those managers' portfolios achieved annualized returns 3.9 to 18.1 percentage points higher than their respective benchmarks—$1.7 billion more than market returns.

As in the past, HMC noted that the cost, including bonuses, of managing funds itself has been less than half the cost of using external managers with equivalent expertise and performance. The compensation of outside managers is not disclosed. Given the steady migration of endowment assets from HMC to such external managers—prompted in most recent cases by HMC personnel leaving to set up their own private firms—Harvard's cost of money-management services is rising. As of June 30, just over half of the endowment was internally managed.