UPDATED: August 9, 2016 at 3:48 p.m.

With the resignation of its CEO Stephen Blyth in late July, the Harvard Management Company is searching for its fourth chief executive in a decade—a pattern of turnover that some experts say could spell trouble for the firm tasked with managing the world’s largest university endowment.

Blyth leaves HMC after less than two years at the helm of the $37.6 billion endowment management firm. He follows Jane L. Mendillo, who departed six years after inheriting the endowment at the dawn of the global recession, and Mohamed A. El-Erian before her, whose one-and-a-half-year tenure saw strong 23 percent returns.

Blyth’s departure continues a recent trend of shorter stints at the head of HMC: For the first 31 years of its existence, the fund saw just one transition of leadership, when its its founding CEO Walter M. Cabot ’55 stepped down from the position and was replaced by Jack R. Meyer. {shortcode-e90990ee6671701bd91c05d4a44899d99c77a006}

For a firm responsible for maintaining an endowment in perpetuity, turbulence at the top can be perilous, several financial experts say.

“You’ve got people with different strategies, one after another, coming in and undoing the work of their predecessor,” said David L. Yermack ’85, a professor of finance at New York University. “Every time you change managers, there's a certain fixed cost when people sell off old investments and buy the new ones that they are more interested in. It's obvious that stability is one thing that HMC really needs.”

‘IN SOME DISARRAY’

In 2008, as Mendillo settled into her new HMC office in the Boston Federal Reserve Building, the floor opened up beneath the global market and took a significant chunk of the Harvard coffers along with it—about $11 billion in FY 2009, or 27.3 percent of the endowment. Plunged into recovery mode, HMC was forced to sell off billions in private equity holdings while issuing $2.5 billion in bonds and making a bevy of budget cuts across the University.

In the years since the financial crisis, HMC’s returns—once booming under Meyer—have more closely traced the NACUBO national average and consistently trailed peer institutions. While far from the 27 percent plummet at the nadir of the recession, HMC’s modest 5.8 percent returns in FY 2015 returns lagged behind Stanford’s 7 percent an and MIT’s 13.2 percent, drawing the concern of University President Drew G. Faust.

In the same period, the Yale Investments Office—under the constant guidance of Chief Investment Officer David F. Swensen since 1985—announced 11.5 percent returns on an endowment of $25.6 billion in Fiscal Year 2015. Under Swensen, Yale has pursued the riskier strategy of pursuing private equity over traditional investments.

Consistent leadership is one edge that Yale has held over Harvard in recent years, said Roger G. Ibbotson, CIO of the hedge fund Zebra Capital Management.

“I really think Harvard is in some disarray at this point,” said Ibbotson, a professor emeritus of finance at Yale. “Yale’s been very stable. David Swensen’s been there since the late 80s, roughly over 25 years, and he’s been a leader in the industry,” he added.

In contrast to the decades of unchanging leadership at Yale, HMC’s executive revolving door has made for jarring transitions in investment strategy, several experts said.

“When you have a lot of turnover at the head, you lose institutional knowledge,” said Charles A. Skorina, who manages a firm that recruits financial executives. “Each chief investment officer has his own ideas as to how to run an endowment and what investment framework makes sense. So it’s always better to have continuity, and they have their friends down in New Haven to show what the benefits of continuity are.”

Promoted from within HMC after success as its head of public markets, Blyth outlined his own ideas for the firm’s coming years in a letter released along with the FY 2015 results: among them, a turn towards factor-based investment strategy that does away with traditional siloed allocation, and plans to tie manager compensation more to the fund’s overall performance.

“It was addressed to the Harvard community and alumni, but it really was an attempt to draw a line under the past and to set a course for the future,” said William F. Jarvis, the executive director of the Commonfund Institute.

“The sad thing is that soon after he came, he had to take this personal leave, and now he’s gone,” Jarvis added.

'AT WHAT POINT IS IT TOO BIG?'

The question, as Skorina puts it, remains: “How can the Harvard endowment, with access to the best alumni network and best talent in the country, consistently have trouble finding a top person, and consistently have problems performing well?”

In a blog post on his website, Skorina offered one possible culprit in HMC’s “hybrid model” of employing both in-house and external money managers. What Skorina considers more successful management firms, including Yale, rely more heavily on carefully-selected external managers and maintain only a minimal internal staff, he said.

“HMC has been unusual in the endowment world by making greater use of in-house staff to invest directly,” agreed Steven N. Kaplan ’81, at the University of Chicago’s Booth School of Business. “This worked very well in the days of Jack Meyer when Harvard used even more in-house staff. In the last several years, that strategy appears not to have worked so well.”

In trying to recruit the best money managers to its in-house team, though, HMC must post salaries competitive with leading hedge firms—meaning that top HMC executives can make tenfold or more what the President of the University receives. In 2014 alone, Blyth earned $8.3 million—a $3 million pay cut from the year before—dwarfing Faust’s $1.2 million compensation. Harvard’s top-earning faculty member, Medical School professor Scott G. Kennedy, earned $646,280 in the same period.

“It’s a potential morale issue around the University if the people in the investment office, are on the one hand, maybe making less than they might make out the outside, but on the other hand, making much more than the faculty,” Ibbotson said.

Indeed, controversy over HMC compensation came to a head in 2003 when the University delayed releasing the salaries of its managers, revealed the previous year to be the highest in academia. Incensed, members of the Class of 1969 penned a letter to then-University President Lawrence H. Summers decrying the salaries in light of the financial burdens on current students and recent graduates.

The following year, HMC’s third-highest earner departed—along with 14 members of his team—to form a hedge fund. Meyer followed the next year, taking four senior managers with him.

“It would be nice to drop out of the public spotlight a little bit,” Meyer said at the time. “Everything Harvard does is closely scrutinized.”

While HMC has shifted more towards external money management in recent years, more than a decade later, pressure on top executives to perform has only persisted, said Brad R. Balter, managing partner of the Boston-based advisory firm Balter Capital.

“There’s a lot of politics when you’re involved in a $37 billion endowment. I think working as the head of Harvard’s endowment sounds wonderful, and you picture leaping through Harvard's campus and meeting professors and going to cocktail parties, and it’s not nearly that much fun,” Balter said. “It’s high-profile, so when you’re not doing so well, I can just begin to imagine the amount of donors who are in your face.”

“Your size may actually be what’s triggering your problems,” Balter continued. “You can be proud of a huge endowment, but at what point is it too big? At what point is it causing more trouble than benefits?”

HUMAN CAPITAL

While Harvard’s fundraising apparatus is stronger than ever, collecting at least a record $6.5 billion in its latest capital campaign, some experts say HMC’s days of market-shattering returns may be behind it. Investing an endowment that rivals the GDP of many small countries, HMC’s next chief will face an uphill battle in restoring the firm to its former glory, several financial experts said.

“Nobody has $35 billion worth of good ideas. It’s as simple as that,” Yermack said. “The bigger you are the, more performance is going to converge to the market average, because you are the average after a while. You are the market.”

In Yermack’s opinion, the best HMC’s executive search committee can hope to do is install a back-to-basics CEO who will minimize costs and diversity the portfolio—not a “celebrity from the hedge fund world.”

Harvard has hired David Barrett Partners, an executive recruitment firm, to to lead the search, and Bloomberg reported that HMC hopes the position to be filled by September. More than a dozen HMC employees declined to or could not be reached for comment regarding the search.

The search committee could comb through three logical pools to find CEO candidates, Jervis said. HMC could promote from within its ranks, look to CIOs of other large university endowments, or seek out Swensen’s proteges who have passed through the Yale Investment Office and disseminated around Wall Street.

Wherever HMC finds its next CEO, Balter said, the search committee will likely look for a long-term leader to steady the embattled firm.

“I think when you’re on your third or fourth person in a relatively short amount of time, no board is going to say ‘Let’s take a risk this time, let’s mix it up,’” Balter said. “They want someone with a Harvard or Stanford on their resume who's managed money for 20 or 25 years and is very well-respected.”

That consistent track record will be crucial, Jarvis said, because unlike a traditional hedge fund, HMC is responsible for protecting the endowment—and the University’s operating budget—forever. This can afford endowment funds a longer-term view than trading firms, he said, but puts pressure on HMC to perform year after year while also planning far into the future.

“Harvard is eternal. And the perspective of the Harvard endowment must also be eternal,” he said.

—Staff writer William C. Skinner contributed reporting.

—Staff writer Daphne C. Thompson can be reached at daphne.thompson@thecrimson.com. Follow her on Twitter @daphnectho.

CORRECTION: August 9, 2016

A previous version of this article incorrectly identified the type of firm of Balter Capital. In addition, a previous version of this article incorrectly named the Yale Investments Office.