Harvard's $12 billion man
Despite outpacing his peers, the strong-willed endowment chief is under attack for paying millions to his money managers
Harvard University's $12 billion man doesn't wear a tie, takes the subway to work, and eats his lunch in the cafeteria on the fourth floor of the Federal Reserve Building. Jack Meyer is a person of few pretensions, but strong beliefs.
One of them is a conviction that endowments like Harvard's have to be broadly diversified. In 1990, when Meyer became president of Harvard Management, the school's investment arm, he insisted the university put its money into assets such as foreign stocks. At the time, the idea was controversial, especially when Harvard's returns were unspectacular. People began asking whether Meyer's plan was a ''slow rabbit." At a company outing in 1992 Meyer gave everyone a hat with a picture of a rabbit. It was a joke with a point: Meyer knew what he was doing and he was sticking with his rabbit.
Today no one would call Meyer's rabbit slow. Year in and year out his shop produces stellar results, routinely ranking in the top 1 percent of big funds. ''These are extraordinarily good results," said Richard Charlton, chairman of New England Pension Consultants in Cambridge. Among large endowments, only Yale and Duke have done better over the past 10 years.
For Harvard, staying ahead of the pack has made a huge difference. Consider: Had the university earned median returns in that same decade, the $22 billion endowment would be $12.2 billion smaller. That $12.2 billion is nearly as large as Yale's endowment, the second-largest in the country. The extra money means Harvard has that much more to spend on everything from scholarships to new buildings.
No one is proposing to erect a statue of Jack Meyer in Harvard Yard, though. In fact, Harvard Management is under the most sustained attack it has faced during Meyer's tenure. A small but vocal group of alumni has set its sights on the multimillion-dollar paychecks awarded to Meyer and his team. He earned $6.9 million last year; his top two money managers earned about $35 million each.
The critics' complaints are getting serious attention from Harvard president Lawrence Summers, a former US Treasury secretary who knows something about finances. Meyer, who designed the compensation system, is characteristically sticking to his guns. ''It is superior to any system I have ever seen," he said bluntly. But Meyer is realistic enough to know that for Harvard, the pay issue is as much about philosophy as it is about math. He acknowledges this is a battle he may not win.
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It is easier to describe Jack Meyer by what he is not: pushy, loud, or flashy. At 59, he is a small, wiry man with red hair and a mustache. He speaks precisely, almost like a scientist. An admirer describes him as ''extraordinarily rational."
When Meyer first arrived at Harvard he dismissed a number of money managers he felt could not work in his system. One of the managers who lost his job told the press that ''Jack Meyer is nothing but a quant," a Wall Street term for a person who makes all decisions based on mathematical models. Soon afterward, someone in the office made up a little sign that read, ''Jack R. Meyer, quant." Meyer still keeps the sign on his desk. ''I think it is Jack's way of saying, 'I don't have an exaggerated sense of my importance,' " said Jay Light, a professor at Harvard Business School.
Meyer grew up in Ohio and graduated from Denison University. From there he went on to Harvard Business School and Wall Street. After 10 years on Wall Street, he became the first chief investment officer of New York City's pension fund. It wasn't clear at the time, but Meyer had found his niche -- not managing money himself, but managing other money managers.
Harrison J. Goldin, Meyer's boss at the time, describes him the way everyone does: smart, effective, and honest. ''He did an exceptional job," said Goldin. Meyer went on to a similar position at the Rockefeller Foundation.
At Harvard, Meyer inherited a curious situation. The university managed most of its own money -- a rarity among endowments. Harvard Management had a team of brilliant money managers. Its performance, however, was strictly middle-of-the-pack.
''We had no real discipline," said a money manager who was there at the time. ''We had a bunch of guys who liked or hated stocks based on nothing more than which way the winds were blowing."
Meyer imposed discipline. He got managers to focus on techniques that add value -- doing better than an index fund would do. For Meyer, adding value is the essence of investing. ''This business is a giant scam," he explained in a recent interview in his office. ''Roughly 85 percent of investment managers don't add value. Those who can are rare." Meyer got Harvard's stock investors to add value by concentrating on their strengths -- picking individual stocks -- rather than trying to time the market. ''Most investment managers feel they have to do everything," said Meyer. ''They don't. They should work where the value can shine through."
Harvard has also benefited from Meyer's diversification strategy. The school today has money in a broad range of asset classes, including hedge funds and timber. Over time, diversification helped Harvard and other big endowments outperform other investors, especially during the bear market of 2001 and 2002.
Meyer's other key contribution is the compensation system. He says it is a good deal for Harvard and has allowed the school to hang on to top-flight investment talent. Managers earn bonuses based on the amount by which they add value or exceed the performance of comparable index funds. Excessive risk-taking is discouraged with a clawback provision. A manager who does spectacularly one year and poorly the next has to give back a large portion of his bonus. Meyer won't provide specific numbers, but he said that over the past eight years, there have been 15 significant clawbacks. ''You can win as well as lose," he said.
In 2003 two of Harvard's managers did spectacularly. David Mittleman earned $36.8 million managing domestic bonds; Maurice Samuels earned $35.6 million in foreign bonds. The two did very well again in 2004, which means they will be entitled to very large paychecks again this year.
''Very few entertainers and athletes even make that much," said David Kaiser, one of seven members of the class of 1969 who wrote to Summers to complain about compensation. Like other critics, Kaiser thinks Harvard could get talented managers for far less money. Worried about the school's image, top Harvard administrators, including Summers, are contemplating changes in the way Harvard manages its money. A decision could come as early as January. Summers declined to comment.
Meyer doesn't agree that Harvard could generate the same returns by paying less. To make his point, he goes over to his desk and pulls out several copies of Alpha, a trade publication that reports on hedge funds.
Since 1998, some of Harvard's top money managers have left to start their own hedge funds, investment vehicles open to wealthy individuals and institutions. Harvard invested in five of their funds.
The managers left for two reasons: because they wanted to run their own businesses and because they could make more money. ''Did they leave because we paid them too much?" asked Meyer.
According to the June issue of Alpha, which tracks the paychecks of top hedge fund managers, the highest paid manager, George Soros, earned $750 million last year. The top 17 managers earned more than $100 million. Red Sox owner John Henry earned an estimated $40 million and didn't make the top 25.
Meyer admits that if Harvard doesn't want to pay the going rates for top managers, it can do what other universities do: hire outside managers for the 50 percent of the endowment currently run internally.
''It wouldn't be the end of the world," said Meyer, ''but our fees would go up and our returns would go down."
For Harvard, the equation is more complicated. According to university sources, the big bonuses and the bad publicity they generate are a distraction for the school.
No decision has been made, but those same sources say it is possible Harvard will choose to scale back the paychecks or hire outside managers.
Meyer is well aware the issue is a sensitive one, and that in the end it may not be possible to retain what he calls ''world-class" money managers in a university setting.
''The tail can't wag the dog," he said. ''We are the tail. Harvard is the dog."
After 14 years, Meyer shows no sign of losing interest in the job. ''This is the best job in the investment business," he said. But then he added, ''It would be nice if we didn't have the compensation problem."
Charles Stein can be reached at email@example.com.