Whether or not hiring outside managers ultimately would cost less than HMC depends on the endowment's performance. "If it costs the University less to put all the assets in external management and performance is no good, that doesn't prove anything," says Cabot. While a majority of investment managers underperformed the Standard and Poors index of 500 stocks this year, Harvard's stock portfolio outperformed the market benchmark, says Cabot.
Managing an endowment internally is a question of a university's philosophy, says Potter. "Do you want to run your own business or hire somebody to do it for you?"
GIVING MONEY TO OTHER MANAGERS
And the university with the nation's second largest endowment has decided to let someone else have a go at its funds. The University of Texas endowment, which was worth $2.9 billion at the end of 1985 compared to Harvard's, which was $3.2 million at the time, had been run entirely in-house until 1981. Then the Longhorns decided to put 10 percent of their portfolio in the hands of external investors. "Managers have a style of how they run investments," says Michael Patrick '65, executive vice chancellor for asset management at UT. "We decided that we wanted to supplement the way we manage money with another style."
But stock performance barely budged under external control and last November, UT switched to different money managers. "We need ultimately those managers to do better than ourselves," says Patrick, who attended the College and Business School before becoming top moneyman at UT.
Although UT's success with new investors won't be apparent for another three or four years, Patrick says the external brokers "appear to be competitive with our internal staff."
Other universities have found that external managers are more cost effective. According to Allen, universities with smaller endowments often split up their assets among many money managers or handle part internally and the rest externally. As a university's endowment grows bigger, it can afford higher overhead costs and justify creating a partial in-house management team, says Swenson.
"A lot of organizations do [management] internally and hire outsiders for what they don't have the ability to do," says Morgan's Potter. "Harvard has a big enough endowment that it can afford to do a lot [of management] themselves. What's right for Harvard may not be right for Yale."
The New Haven school, with the nation's fourth largest endowment, runs its money with a combination of both internal and external management. Eight outside managers play the stock market for 75 percent of Yale's funds, while a 15-member in-house investment team directs real estate and bond management. Swenson says that Yale's endowment "is generating a high return by hiring outside firms with expertise." Yale's endowment climbed at over 23 percent last year, at about the same rate as Harvard's funds. Yale will not be managing more of its money internally in the foreseeable future, says Swenson.
And in maintaining the difference between Cambridge and New Haven, Harvard has no plans to manage its money externally in the near future, certainly not when its pays so well.