As all the world now knows, Harvard has selected Columbia’s Nirmal P. “Narv” Narvekar as the new head of Harvard Management Company.

His name had been bandied about as a prime candidate for weeks.  We discussed it ourselves in our August 29 newsletter.

See: https://www.charlesskorina.com/harvard-management-company-size-really-matter/

Reportedly, a few big-endowment CIOs were not interested in the job.  Fortunately, Mr. Narvekar was. 

He is an exemplary investment manager and, for what it’s worth, we think Mr. Finnegan and his board made a good choice. 

The Columbia endowment and its two amigos:

In 2002 Columbia University set up a new investment management company (CIMC) with its own board, and hired Mr. Narvekar as its founding president.

They plucked him from the University of Pennsylvania investment office where he’d been a managing director for four years, tasked with diversifying into private equity and other alternatives. 

Previously, he’d spent 14 years with J.P. Morgan, including six years as managing director in their equity derivatives group.  He’s a Phi Beta Kappa graduate in economics from Haverford College, and his MBA is from Penn’s Wharton School.

It’s a sterling resume, but people don’t hire resumes they hire performance and Mr. Narvekar’s performance numbers are outstanding, as we’ll see below.

And, we’re sure he’s been offered a salary commensurate with that performance.  We’ll also discuss that important topic.

Shortly after he arrived at CIMC, Mr. Narvekar reached out to Peter B. Holland, an old colleague who had worked with him in JP Morgan’s derivatives group, bringing him in as chief investment officer.  The two men have worked closely together for more than twelve years, and to excellent effect.

We were unsurprised to see Mr. Holland elevated immediately to the top job at CIMC as Mr. Narvekar departs.  Despite all the talk about the importance of succession-planning, few organizations really have a proper successor on the launch pad.  Columbia, fortunately, did; and we expect to see no hiccups in the organization they jointly built.

A makeover for HMC?

We (and many others) have written at length about Harvard’s difficulties and will spare you any more rehashing.

We had our say here: https://www.charlesskorina.com/harvard-endowment-hmc-time-reassess/

But the hire of Mr. Narvekar raises some obvious questions about the structure and direction of HMC going forward.

The previous two HMC presidents were hired under the aegis of the late James F. Rothenberg who chaired the HMC board until his sudden death last summer.  It fell to the new chairman – Paul J. Finnegan – to run the search that found Mr. Narvekar.  And the selection of a new president by a new chairman may involve more than just redecorating a single office.

Mr. Narvekar leads about 20 staffers at CIMC.  When he arrives in Boston he’ll be greeted by over 200 HMC employees.  That 10-to-1 ratio neatly underlines the situation he’ll be stepping into.

We think there will be at least some chipping away at Harvard’s “hybrid” model with its attendant high headcount, but probably not a revolution.  We’re sure Mr. Narvekar and Mr. Finnegan have already discussed this unavoidable and delicate topic.

Our latest OCIO list (Outsourced Chief Investment Officer) just expanded by three firms since our September sendout, with UBS and PNC Bank rejoining the ranks and Highland Associates in Birmingham, Alabama reaching out for inclusion.

With 74 firms on the list as of November, 2016, total outsourced CIO assets (managed with full discretion) now total $1.367 trillion, increasing by $240 billion since we published our last list in 2014.

(Our full OCIO list of firms for 2016 is presented at the end of this newsletter.)

Our friends at Chief Investment Officer Magazine think that OCIO assets grew 17 percent year-over-year from 2014 to 2015, and almost 10-fold (860 percent) over the eight years 2007-2015.  That eight-year growth ($91 billion to $873 billion) implies an annual growth rate (CAGR) of about 30 percent, but with growth beginning to slow down in 2014.

See: http://www.ai-cio.com/2016-Outsourced-Chief-Investment-Officer-Buyers-Guide/

(Pedant alert: 860 percent growth over eight discrete periods gives us 33 percent annualized.  Continuous compounding gives us about 28 percent.  The underlying data is too soft for over-precision, so we split the difference.)

Our own independent surveys for 2014 and 2016 imply that recent year-over-year growth is now only about 9 percent.  So we agree with Chief Investment Officer Magazine that OCIO growth seems to be decelerating.

Nine percent annualized is still pretty brisk, but it’s not that much higher than the expected growth of managed global assets overall.  It suggests that the OCIO niche may be maturing, with a lot of the low-hanging fruit having been plucked.

My unscientific survey of OCIO managers suggests they’re a little more conservative in their own estimates.  They typically tell me they’re looking for 5 percent growth, but of course each firm has its own view.

They tell me that the number of RFPs is definitely up, but that potential clients aren’t always sure whether they want a fully-outsourced solution, a consulting/management hybrid, or a traditional straight-consulting arrangement.

The number of firms in this niche, however, seems to have plateaued and even fallen off a little in recent years.

Our list has grown from forty-five outsourcers six years ago in 2012 to seventy-nine in 2014 to seventy-one today.

Some have chosen to leave the business for one reason or another.  Those include: Fortress, Fiduciary Research & Consulting, Salient Partners, and UBS. A few others either failed to respond to repeated requests or asked not to be listed.

And, at least three firms – Pacific Global Advisors, Marco Consulting, and Jeffrey Slocum & Associates – have been gobbled up by bigger firms: Goldman Sachs, Segal Rogerscasey, and Pavilion Financial respectively.  So their AUM lives on under another label.

As headhunters, we’re not surprised to see that steady growth in outsourced AUM leads to a steady flow of management talent into the OCIO firms.

From the point of view of potential clients, the number of firms competing hard for their business is a good thing.  Not only are the vendors competitive on price, they are building their bench with top talent.

[Note: we published this piece on August 29, before Harvard announced its hire of N.P Narvekar and its disappointing returns for FY2016]

In asset management, as in other endeavors, size really does matter.

Bigger is better.  But growth in AUM drives growth in headcount and complexity; and that can overwhelm existing structures and challenge management.

A few weeks ago in “Crunch Time for the Harvard Endowment” we referred to HMC’s hunt for a new “CIO” although, technically, the top job at HMC is “CEO.”

See: https://www.charlesskorina.com/crunch-time-harvard-endowment/

In this niche that’s often a distinction without much difference, and we tend to use “CIO” generically; but for Harvard there’s a real challenge behind that equivocation.

A CEO, in proper corporate-speak, manages people, structure, and processes.  A CIO, of course, develops and executes investment strategy to maximize returns.

The HMC board hopes to find a candidate who is both an outstanding investment strategist and a proven, effective manager – a CIO and a CEO.

[Note: we published this piece on August 4, before Harvard announced its hire of N.P Narvekar and its disappointing returns for FY2016]

The hunt is underway for a new CEO at the Harvard Management Company.  And chairman Paul Finnegan and his board intend to get it right this time.

Counting interims, they’ve now had six CEOs at their shop since Jack Meyer departed in 2005, and mostly mediocre returns to show for it.

After Mr. Meyer’s departure it took a one-year search to land Mohamed El-Erian, who then lasted less than two years before he moved to PIMCO.  Now, Stephen Blyth has departed after just 18 months on the job.

It looks like this search will be briefer.  Some sources say they may have someone aboard by September.  But in any case the board needs to set a new course with a new leader.

Last month, before Mr. Blyth’s resignation was announced, we looked at Harvard’s performance (especially versus Yale), and suggested that it might be time for HMC to undertake a major re-think of its business.  Maybe their vaunted “hybrid model” is no longer viable.

See: https://www.charlesskorina.com/harvard-endowment-hmc-time-reassess/

We did not expect to be revisiting the subject so soon, but events have overtaken us.  So here we are again.

What’s on the board’s mind?

Mr. Finnegan, who became HMC chairman late last year, is a private equity investor and we note that Harvard also announced — in an unusual year-ahead notice in May — that David Rubenstein of PE giant Carlyle Group would be joining the Harvard Corporation board in 2017.

See: http://harvardmagazine.com/2016/05/harvard-appoints-david-m-rubenstein-senior-governing-board

Add to this a statement from Mr. Finnegan on July 27 that HMC going forward would lean more on outside money managers “who have the resources, skill and experience.”

See: http://www.bloomberg.com/news/articles/2016-07-28/behind-harvard-shakeup-a-star-trading-desk-that-unraveled-fast

Taken all together, this portends a shift — or at least a tilt — from HMC’s “hybrid” structure to something closer to the Yale “purebred” model.  And Yale, incidentally, has been cleaning Harvard’s clock in private equity for years.

See: https://www.charlesskorina.com/wrangling-unicorns-yale-celebrates-vc-heroes/

If internal management of public-market assets, which was Mr. Blyth’s forte, is to be de-emphasized, then it would make sense to look at successful big-endowment CIOs who are already executing such a mostly-outsourced and alternatives-heavy model.

[Note: we published this piece on July 12, before Harvard announced its hire of N.P Narvekar and its disappointing returns for FY 2016]

It’s been ten years now since Jack Meyer stepped down as head of the Harvard Management Company, while David Swensen – now in his 31st year – has carried on at the Yale Investment Office.

Each endowment has pursued its own distinctive management model: HMC with its “hybrid” internal/external approach, versus YIO’s exclusive reliance on cherry-picked external managers.

We can now call the winner: It’s Yale.

And it’s time for HMC to undertake a major re-think of its business.

Six out of 13 members of the Harvard Corporation board are Harvard MBAs, and they understand what the stakes are.

President Drew Gilpin Faust has ex-officio seats on both the HMC board and the Harvard Corporation board (where the real power lies).  But the chair of the HMC board is Paul J. Finnegan, who also happens to serve on the Corporation board as Treasurer and chair of the finance committee.  

Mr. Finnegan is co-CEO of Chicago-based private-equity firm Madison Dearborn Partners.  He has been deeply enmeshed in Harvard’s affairs for many years and is highly respected.

See: http://news.harvard.edu/gazette/story/2014/05/finnegan-new-harvard-treasurer/

Currently, Harvard harvests about 4.3 percent of endowment AUM annually.  In 2015 that amounted to $1.6 billion.  And that powered thirty-five percent of the school’s budget.  (Off the record, the endowment’s contribution is greater.)

Harvard has earned an annualized 7.6 percent over ten years, versus Yale’s 10.0 percent.

It’s clear that an additional 2.4 percent annualized over ten years would have left Harvard with much more than a mere $37.6 billion endowment.  And that difference would have added hundreds of millions per year to their operating budget.