Financial experts attribute HMC's success in keeping the University's endowment the largest in the nation to two major points--the company's relative independence from Harvard and Cabot's adventurous investment style.

According to Cabot, the success of HMC stems from the independence that the University, "in its wisdom," gave the firm right from its conception. As an example, Cabot points to the fact that the company has its own board of directors, benefit plans for employees, hiring procedures and compensation programs.

And the University was willing to go to a lot of trouble, Cabot says, to put together a "first class organization"--and to give the director himself essentially a free hand in making investment decisions.

"They were willing to pay compensation competitive to the investment world," Cabot says. "And they placed great responsibility on the CEO in the sense that he would manage the activities of the company, that they weren't going to get in the way of investment policy."

Cabot says that although the University does "provide careful oversight," the independent nature of HMC is what he believes makes the difference between the Harvard investment company and the systems at other schools.

"The problem that my colleagues at other universities have is that investment committees dictate what they should do," Cabot says. "My counterparts don't really have a major role."

Roberta M. Weil, vice-president for investments at Columbia University, says Harvard's system for making investment decisions is quite different from the structures at most universities.

"It's certain that the Harvard system offers [Cabot] a lot more freedom, there's no doubting that," Weil says. "Whenever Walter Cabot makes a decision to increase or decrease allocation of endowment in equity, he doesn't have to worry about getting the go-ahead from the board, and I do. So he has certain advantages."

Weil points to Princeton as the only other Ivy League school with an investment firm similar to HMC, but she acknowledges that the two are hardly comparable, given the smaller size and narrower focus of Princeton's investments.

One of the reasons that Harvard has been able to establish an independent but internally-owned company to manage its endowment is that the University is in an unusually strong financial position. While most schools couldn't feasibly support the staff of an investment firm with their limited funds, Cabot says Harvard has the "money and resources it takes" to run an internal management firm.

"Nobody manages the scope of investments Harvard does," Cabot says, adding that many schools look to HMC as an exemplary investment firm, but that few could actually implement a similar system.

A Sometimes Brash Investor

And in the relatively conservative field of endowment management, where each university's goal is primarily to maintain its economic standing, Harvard is seen as a large and sometimes brash investor. The University was among the first to become involved in the realm of venture capital and leveraged buyouts (LBO), both of which offer high yields on investment, but at a high risk.

It is Cabot's willingness to venture into uncharted investment areas that has defined the philosophy of HMC over the course of his tenure. Starting with a portfolio with "100 percent of Harvard's equity in large, common blue-chip stocks," Cabot says he threw out tradition and began looking to areas previously shunned by endowment managers.

"My philosophy is that this is not a portfolio that you should take to the racetrack," Cabot says. "But within that umbrella of protection of capital, if we're going to keep Harvard as the preeminent organization, then we must produce superior returns and you can't do this unless you take risks."