UPDATED: September 23, 2015, at 4:35 a.m.

In his first annual letter to alumni as Harvard Management Company’s president and chief executive officer, Stephen Blyth laid out sweeping changes to Harvard’s investment arm.

Blyth, who took over for Jane L. Mendillo on Jan. 1, made it clear Tuesday that he plans to chart a new course as CEO. Changes coming to the company include a new compensation model, Blyth said, as well as an overhauled investment approach, the introduction of core objectives, and an explicit goal to perform in the top quartile of the next 10 most valuable university endowments.{shortcode-13b906df70be70da740c040f7667bbbb36989a3d}

Blyth detailed the changes in an annual letter that came as Harvard announced a 5.8 percent investment return, which once once again trailed major peer institutions like Stanford (7 percent) and MIT (13.2 percent), though it beat the University of Texas System (3.4 percent). While HMC beat the median endowment return, Blyth acknowledged that “it is unlikely that our return in fiscal year 2015 will materially improve our performance relative to our endowment peer group.” On average, endowments of higher value outperform their smaller competitors.

Among the salient issues the new CEO touched on was compensation. Blyth outlined a plan to change HMC’s compensation method, writing that he aims to tie more of portfolio manager compensation to components linked to the overall success of HMC.

“Fostering a deeper sense of ownership in the overall success of HMC amongst all our staff, and developing a true sense of partnership amongst senior investment professionals at HMC, are key priorities for me,” Blyth wrote in the letter.

In the letter, Blyth also offered candid evaluations of the $37.6 billion fund’s performance in each asset class and a sober assessment of Mendillo’s performance in her last four years, when HMC’s returns were fourth in the top 10 endowments each year from a rolling five-year annualized view.

“HMC must remain competitive for Harvard itself to confidently maintain its own preeminence as a University,” Blyth wrote. “However, recent performance against [the top 10 endowments] metric has been disappointing.”

Blyth set two other overarching objectives. He said the fund will seek to earn a real return of at least 5 percent on a 10-year annualized basis and that it will aim to outperform market and industry benchmarks by at least 1 percent when annualized over five years.{shortcode-bc10c48ad1369052106ca62f7a83d68b5f2b43ab}

The biggest potential break from the past, though, was a multi-page-long exposition on what Blyth called HMC’s new investment approach and dubbed, “Flexible Indeterminate Factor-based Asset Allocation,” or FIFAA. While a more complete explanation of the framework is expected to be published in the Journal of Portfolio Management in 2016, Blyth described the approach as one “that is capable of expressing less quantifiable investment ideas and objectives around a rigorous core.” He added that the framework will divide the overall portfolio into “systematic ‘factor’” and “non-systematic ‘residual’” components.

Previously, HMC set a “Policy Portfolio” of asset class distributions for each fiscal year in its annual reports. The current model, according to Blyth’s letter, instead gives general ranges—some as large as 13 percentage points—which will give HMC more flexibility.

At the conclusion of his letter, Blyth commented on his overall outlook on the financial sector. He wrote that generally inflated private equity valuations have produced an environment which he said is “likely to result in lower future returns than in recent past” in that asset category.

Private equity has been a popular investment sector for HMC in recent years, steadily increasing its investments in the sector since 2009. Due to Harvard’s liquidity constraints during the financial crisis of 2007 to 2009, HMC was forced to sell many of its investments in private equity before they matured.

Blyth commented on future Federal Reserve policy, writing that HMC is in the midst of “analyzing potential effects of higher rates throughout the portfolio, in particular examining the possibility of second order effects if many asset classes...were to decline simultaneously.” The Federal Reserve is expected to raise interest rates at some point later this year or early in 2016.

—Staff writer Tyler S. B. Olkowski can be reached at tyler.olkowski@thecrimson.com. Follow him on Twitter @OlkowskiTyler.

—Staff writer William C. Skinner can be reached at wskinner@college.harvard.edu. Follow him on Twitter @WSkinner.