1.
What are some advantages that HMC has over its
competitors?
Some of the biggest
advantages of the HMC over it’s competitors i.e. other endowment funds can be
stated as following:
·
Because of
Harvard Management Company’s association with Harvard University (a globally
recognized Ivy league institution), the portfolio managers and research
analysts enjoyed access to some of the best research from around the world
·
HMC also had a
AAA credit rating – which implies that it had extremely low borrowing costs to
leverage up its bets, regardless of size
·
AAA rating also
helped HMC to be recognized as a favorable swap counterparty
2.
In class you saw a number for the target real
expected return for HMC: around 6.25%. How is this figure derived in the case?
Basically:
6.5% = 4.5- 5% + 1.5 %
If in the long run – the
endowment fund was able to generate returns of 6.5 % over the CPI (benchmark),
then that would meet the needs of the policy stated by the board.
Where the 4.5% is what is needed to cover the expense of the university, and the 1.5% gap would need to be filled by gifts and donations.
“In the last several decades, spending as a percent
of endowment value had been as high as 5.9% and as low as 3.3% but had averaged
4.6%.”
3.
What is the Policy Portfolio? Can HMC deviate from
its weights? Do you think the Policy Portfolio is a useful concept? (Is it
really necessary, or did HMC set it up just to satisfy the Board?)
Meyer essentially
established the ‘policy portfolio’ in 1990 after an extended set of analysis
and discussions about return expectations and risk Tolerances. One of the key
pillars of the policy portfolio was to focus on long-term opportunities for the
endowment and not to focus on short-term market fluctuations.
Exhibit 3 shows what the
policy portfolio is under ‘neutral conditions’ and what the expectations are
under normal conditions.
While the Policy portfolio
is the guideline for performance – the HMC fund is allowed to deviate from its
weight as stated in exhibit 3, provided it stays within tolerance. This system
of allocation and rotating asset classes and capitalizing on opportunities is
what is termed as ‘tactical asset allocation’.
The policy portfolio is a
good guideline/mechanism because it let’s users observe performance of asset
managers from an objective standpoint and prevents them from succumbing from
their biases i.e. moving too far away from their area of expertise and
deviating from the portfolio goals.
By keeping a policy, HMC can
control and measure the performance in one core way – over performance over the
policy requirement.
