"When you hire a manager you have to stick with him. If you meddle too much, you won't know whether the results are yours or his," Putnam says.
Private management companies for universities like HMC are rare; most colleges use outside firms. Jerald L. Stevens, Yale treasurer, says Yale splits its endowment up among five external managers. "We have contracts where we hold them to a management fee and to targeted results." Stevens says. "We don't anticipate moving to a Harvard model," he adds.
Stevens agrees that HMC's set-up helps keep talented managers. But, he says, "There's a possible disadvantage in not having the flexibility to decide that someone--no matter how much time they're spending--isn't doing a good job. It's a different kind of decision to say to someone, 'We don't like you and we're going to fire you,' than to tell a company, 'We're going to move to a different company.'"
One reason Harvard can attract the kind of huge gifts it is counting on during its five-year, $250 million Harvard Campaign is its "good aura of investment management," Putnam says. "Alumni will only give when they think their money will be managed well--people will set up trust funds for Yale," putting a gift in a private manager's hands and sending Yale the interest, he says. But he adds that Yale's "aura" is worse than it deserves.
The strategies that have served HMC well so far and that have given Harvard its "aura" depend on optimistic expectations that the American economy will eventually break out of the "inflationary psychology of buying today because it will be more expensive tomorrow," Cabot says. The University invests more heavily in the energy and capital goods industries that thrive in the strong industrial economy Harvard is betting on.
Harvard followed a conservative market strategy through the 1960s, when other investors were taking ever-larger risks, and today--though it remains prudent compared to most private investors--Harvard is buying more stocks. "We think stocks got over-valued from 1950 to 1972, and now there's a pendulum swing the other way," Putnam says. "We're taking this as a long-term opportunity to get some damn good stocks cheap," Cabot says.
No matter what choices Harvard makes in the stock/bond mix, however, and no matter how successful HMC is in increasing annual income from the endowment, inflation stands in the wings ready to devour the most impressive investment record. Even the hundreds of millions the Harvard Campaign will tack on to the endowment will only delay the day of reckoning if double-digit inflation continues. In years of 10 to 12 per cent inflation, like 1974 or this year, the real value of the endowment will fall despite the best record in the stock and bond markets.
The University draws 29 per cent of its income from student tuition, 26 per cent from government funding of research and financial aid, 14 per cent from gifts, and 21 per cent from income on the endowment. The government isn't increasing much, and the endowment remains the same--so students find themselves making up the balance, Putnam says. "We hope the securities market will do well enough to carry its own share," he adds.
If Harvard moved all of its money into fixed-income bonds, he explains, it could easily earn 10 per cent income on the entire endowment each year. But that strategy would leave no way to raise the value of the endowment's principal over the long run. Inflation has chopped the endowment's real value (measured in dollars adjusted for inflation) by half over the past 15 years, Cabot says. So HMC keeps a balance between stocks and bonds within Corporation guidelines of at least 50 and at most 70 per cent in stocks. The mix usually hovers between 55 and 60 per cent--less stock than most universities--but it could rise as high as 70 per cent as HMC picks up new stocks in the depressed market, Cabot says.
This answer to the "asset mix question" is the centerpiece of Harvard's market strategy, but HMC also tries to use its flexibility to experiment in sophisticated fields like stock-lending, arbitrage and options. "These tools are not very well known in the investment business, and we want to know at least as much about them as anyone else," Putnam says.
HMC keeps its lines to other universities open, too, mostly through Cambridge Associates, which pools information from 20 schools. "You get into trouble in this business if you just talk to yourself all the time," Cabot says. Stanford for example, has a successful record investing in real estate development, and Harvard has begun to experiment with venture capital. Cabot says there's no reason for colleges to keep their experiences to themselves.
By mixing such innovation into Harvard's traditionally ultra-conservative management, HMC has outpaced many other schools; it nonetheless remains far behind inflation. Both Cabot and Putnam, however, believe Harvard and its endowment will weather the current crisis. Cabot says inflation should become a more emotional issue. "Eventually, kids will be getting mad not about South Africa, but about the price of lettuce. South Africa is an important issue, but people haven't shaken their fists enough about inflation," he says. If they do, then Cabot believes the government could launch a crash energy development program that would spur the economy, like the space program in the 1960s.
Putnam says if inflation keeps up, Harvard may have to shed its traditional reluctance to share students and programs with other universities. "Harvard's problem is, it tries to be all things to all students," he says. Harvard may eventually have to exchange students with the Massachusetts Institute of Technology in some fields of physics, or with Wellesley in fine arts--"There's got to be more of this exchange; it's silly to have competing departments so nearby," Putnam says.
Major economic disasters might force Harvard to curtail academic programs or pay more attention to the financial resources of applicants. Putnam says, "Things maybe won't work the way we want them, and there might be disasters, but I think we can handle them."