The recent new that Harvard University’s endowment fund is to outsource more of its investment to external asset managers underscores the growing demand for expertise in the low return world.
Harvard is to cut its 230-person staff in half and move away from its decades-long in-house approach to investment strategy. Its $35.7 billion endowment fund has underperformed other Ivy League funds, shining a glaring spotlight on the high salaries and bonuses of its money managers.
Alumni have been often critical of the performance evaluation and incentive structures of managers and especially so over the last ten years when average annual total returns have been 5.7% — the second lowest among Ivy League universities.
The chief executive of Harvard Management, Narv Narvekar, attributes the change in strategy to heightened competition for talent in the industry — something that has made it difficult to attract and retain investment experts.
Harvard serves as a case study highlighting the two factors driving institutional investors to outsource: the need for specialist capabilities and the pressures to achieve better investment returns. Our recent research reveals that demand for expertise and the hunt for higher returns are the top reasons for investment outsourcing.
Outsourcing initially gained traction among smaller institutions lacking the necessary capability to build robust internal investment teams. Today, outsourcing has ballooned beyond that initial scope as the need to produce returns in the new ‘normal’ of low yield has institutions looking elsewhere. Our research shows that one in eight institutional investors who do not currently outsource are considering it in the future.
Most large universities outsource some of their endowment portfolio management. In many ways, Harvard is late to the party. The key decision for institutions is what to outsource and what to keep in-house. How institutional investors divvy up the workload will depend on their investment strategy. Harvard, for example, is keeping its natural resources portfolio in-house.
Others may look to outsource all decision-making or create partnerships where they work alongside outsourced investment experts. The flexible nature of outsourcing models means institutions can tailor strategies in line with preferences and goals.
Outsourcing gives staff more time to focus on certain areas of portfolio strategy. And it is ultimately undertaken to better serve the end client. The outsourcing dilemma is no longer “Does it work?” but “How will it work for us?”