Q&A with Jane Mendillo

President and CEO, Harvard Management Company

For Jane Mendillo, her birthday is no longer her own. Forever associated with "the day Lehman Brothers filed for bankruptcy," September 14, 2008, and the months immediately following, remain indelible memories. "I returned from dinner with my husband and began responding to multiple voice and email messages from the office," she says. "The next morning at 7 a.m., we began what became a daily meeting to review changing market conditions and make adjustments. We worked on the problems in our portfolio daily and, thanks to that active management, 2008 was less damaging than it might have been."

On September 9, 2009, nearly a year later, Gift Strategies had the opportunity to ask Mendillo to reflect on the past year, the state of the endowment, and what the future holds.

Q: What was last year like?

I certainly did not foresee that my first year as CEO of Harvard Management Company would be the most unusual year for the markets in several generations. In September 2009, we announced that the endowment's investment return for the year ending June 30, 2009, was minus 27.3 percent. While Harvard's endowment has experienced negative returns in prior times, this was the sharpest downturn for our fund in many, many years. Clearly, the last year was difficult for Harvard, as it was for most of our peer institutions. While we suffered significant losses, the year was not without its bright spots. I believe that Harvard came through as well as we did because we did not panic and we kept our long-term focus.

Q: How has the management of the endowment changed in the wake of the economic events of the past year?

We've made changes to the team and the portfolio along a number of dimensions, including our organizational structure, our strategic orientation, and our liquidity position. Regarding the organizational structure, we've built a new management team here this year, creating a new chief operating officer position within HMC, filled ably in October by Bob Ettl, who joined us from Allianz/Pimco. In addition, I appointed two experienced and talented HMC portfolio managers, Stephen Blyth and Andy Wiltshire, as head of internal management and head of external management. These three new positions allow us to better mesh the investment strategies of individual managers and to assess our opportunities more clearly across the portfolio, as well as to provide excellent operational support to those managers. We have also added several new portfolio managers who add depth and breadth to our teams in areas including Asian markets, equity arbitrage, real estate, and externally managed funds. We continue to employ a "hybrid model" of investment management, meaning that we employ a mix of internal and external managers in the active investment of Harvard's endowment assets. Whether internal or external to HMC, we are determined to seek out exceptional individuals with unique investment insights, people who will drive value for the endowment portfolio over the long term.

In terms of our strategic vision, there were a few adjustments as well. We have sharpened our focus to concentrate on the "best of the best" investments and relationships for inclusion in the Harvard portfolio. Our bar is very high. We are committed to diversification, but not for diversification's sake—every strategy must add value. We are looking to expand our sights beyond existing asset classes and working across disciplines on cross-sectional investment themes. We know the value of being an early adopter of new strategies, as we were with asset classes like private equity and timber. We will look to add weight in areas where we have specific competitive or knowledge advantage.

Finally, we have taken actions to increase liquidity and reduce leverage across the portfolio. The University's reliance on the endowment has grown, and so we need to be aware that we must be positioned to meet that need. The flexibility that comes as a result of these combined actions will also position us to invest in new themes coming out of the financial crisis.

Q: What is the long-term investment strategy for HMC moving forward?

Our long-term goal is to seek substantial growth in endowment assets while managing investment risk on behalf of the University. We remain committed to the basic principle of managing and measuring ourselves against a Policy Portfolio benchmark that is focused on long-term returns and appropriate risk management. We have made and we will make changes to the Policy Portfolio as our long-term market expectations change and/or as the University's risk profile changes. Harvard has done very well over the long term—the Policy Portfolio and active management in relation to the Policy Portfolio have worked. Over the last 10 years, the average annual return on the endowment has been 8.9 percent, versus the Policy Portfolio return of 4.5 percent, amounting to $13 billion of value-added over the Policy Portfolio return, and $18 billion of value-added over what would have been earned by a simple 60/40 stock/bond portfolio. In the near term, we may adjust the Policy Portfolio in ways that make fewer distinctions among discrete asset classes, concentrate more in areas where HMC has unique competitive strengths such as fixed income and real assets, and better fit with the University's risk profile.

There will be many opportunities to generate value through prudent and creative investment strategies in the coming months and years. However, we must be realistic about HMC's ability to fully reshape the current portfolio in the short term. It will take substantial time and effort to regain all of the market value lost as a result of the global economic crisis.

Q: Why did you choose to come back to HMC?

When I came to HMC in 1987, I felt energized and fortunate to be in the Harvard environment, and I still feel that way today. Endowment management is endlessly intellectually challenging. I interact with smart people on the cutting edge of their fields on a daily basis. We are all dedicated to supporting this great university through the generation of strong investment returns.

I am passionate about our mission. There are aspects of managing investments in an endowment that are very specific to endowments—this is more than just investment management. After 22 years—and it is hard to believe it's been that long since I first walked through the doors of HMC—this is still the best job I can imagine and the most important work I can conceive of doing.