By Nicholas A. Vardy, CFA
Nor has Harvard's staff of around 200 former Masters of the Universe been shy about writing themselves checks for huge salary and bonuses. Former CEO Jane Mendillo earned $13.8 million in 2014. Other top traders at Harvard have made as much as $30 million in a single year.
How Nevada is embarrassing Harvard
Carson City, Nevada, is a long way from Cambridge, Massachusetts.
That's where Steve Edmundson manages the Nevada State Pension fund — which, at $35 billion, is just about the same size as the Harvard endowment. Nevada's State Pension fund, however, differs from Harvard in other crucial ways.
First, Steven Edmundson is the only investment professional managing the Nevada State Pension Fund. The University of Nevada, Reno, alumnus has no other internal professional staff.
His investment strategy?
Do as little as possible — usually nothing . That is because Edmundson invests Nevada's pension fund's assets in low-cost passive investment vehicles.
Second, Edmundson earns an annual salary of $127,121.75. That's a long way from the multimillion dollar pay packages collected by top portfolio managers at Harvard. Ironically, his salary also matches just about exactly the $126,379 salary of an Assistant Professor at Harvard — typically a 27-year-old academic who has just completed her Ph.D.
Third, and perhaps most astonishingly, the Nevada State Pension Fund's investment track record soundly beats the Harvard endowment over the past decade.
While Harvard returned 5.7% annually over the last 10 years, the Nevada State Pension fund has generated annual returns of 6.2%. Over five years, Nevada has extended its lead, returning 7.7% per annum, while has Harvard stagnated at 5.9%. That outperformance of 1.8% per year is a country mile in the investment world.
As it turns out, Nevada is also beating the returns of the nation's largest public pension fund, the California Public Employees' Retirement System, or Calpers. Nevada's investment returns beat Calpers over one-, three-, five- and 10-year periods.
Sure, Calpers is a different beast, managing about $300 billion. However, it also has a staff of 2,636 employees to generate its returns
Edmundson is essentially a one-man band.
What is to be done?
So does Nevada's outperformance of the Harvard endowment mean it should abandon the famous "Yale model" of endowment investing with its eye-popping allocations to alternative asset classes like private equity, venture capital, and hedge funds?
Should Harvard mimic the Nevada State Pension fund success, fire the bulk of its investment staff, and only invest in low-cost index funds ?
Although that strategy would likely improve Harvard's investment performance, the answer remains "probably not."
Over the past 10 years, Yale has generated an annualized return of 8.1% on its endowment with a staff of about 25 investment professionals, by definition staying true Davis Swensen's original "Yale model."
And after all, Yale did outperform Nevada's 6.2% return over the past decade. An outperformance of 1.9% per year is substantial.
So it seems less that the "Yale model" itself is broken than it is Harvard's investment team that has tripped over itself during the past decade. But it does mean that the Harvard endowment and its overpaid staff of 200 investment professionals has to get its act together.
And it had better do so ... and fast.