Harvard Case - Harvard Management Company (2010)
"Harvard Management Company (2010)" Harvard business case study is written by Andre F. Perold, Erik Stafford. It deals with the challenges in the field of Finance. The case study is 23 page(s) long and it was first published on : Sep 8, 2010
At Fern Fort University, we recommend that Harvard Management Company (HMC) adopt a multi-pronged strategy to address its challenges. This strategy will involve:
- Diversifying its investment portfolio to reduce reliance on traditional asset classes and explore new opportunities in emerging markets, private equity, and alternative investments.
- Improving its risk management framework to proactively identify and mitigate potential risks, including those associated with market volatility and geopolitical events.
- Enhancing its transparency and communication with stakeholders, including the Harvard Corporation and the broader public, to build trust and foster a more collaborative approach to investment decision-making.
2. Background
The case study focuses on Harvard Management Company (HMC), the investment arm of Harvard University, facing significant challenges in 2010. HMC's investment performance had been lagging behind its benchmarks, and the company was under pressure to improve its returns. Additionally, HMC was facing scrutiny from the public and the media regarding its investment practices and its high fees.
The main protagonists of the case are:
- Jane Mendillo: The CEO of HMC, responsible for leading the company through this challenging period.
- The Harvard Corporation: The governing body of Harvard University, responsible for overseeing HMC's activities.
- The Harvard community: Students, faculty, and alumni, who have a vested interest in the performance of HMC's investment portfolio.
3. Analysis of the Case Study
Financial Analysis Framework:
We will analyze the case using a financial analysis framework, focusing on:
- Financial Performance: Examining HMC's historical investment performance, including returns, risk, and asset allocation.
- Financial Position: Assessing HMC's financial health, including its liquidity, leverage, and capital structure.
- Financial Strategy: Evaluating HMC's current investment strategy and identifying areas for improvement.
- Risk Management: Assessing HMC's risk management framework and identifying potential areas of vulnerability.
Key Findings:
- HMC's investment performance had been lagging behind its benchmarks. This was primarily due to the company's heavy reliance on traditional asset classes, such as stocks and bonds, which had underperformed in the wake of the 2008 financial crisis.
- HMC's fees were high compared to other institutional investors. This led to criticism from the public and the media, who questioned the value HMC was providing to Harvard University.
- HMC's risk management framework was inadequate. This was evident in the company's failure to anticipate the 2008 financial crisis and its subsequent losses.
4. Recommendations
1. Diversify Investment Portfolio:
- Increase allocation to alternative investments: This includes private equity, hedge funds, real estate, and infrastructure. These investments offer potential for higher returns and diversification benefits.
- Explore emerging markets: Emerging markets offer attractive growth opportunities and can provide diversification benefits.
- Develop a strategic allocation framework: This framework should define the target asset allocation for each asset class, based on risk tolerance, return expectations, and market conditions.
2. Enhance Risk Management Framework:
- Implement a robust risk management system: This system should identify, assess, and mitigate potential risks across all asset classes.
- Develop a comprehensive risk appetite statement: This statement should define HMC's tolerance for different types of risk, including market risk, credit risk, and operational risk.
- Conduct regular stress testing: This involves simulating different market scenarios to assess the potential impact on HMC's portfolio.
3. Improve Transparency and Communication:
- Publish detailed investment reports: This will provide stakeholders with a clearer understanding of HMC's investment strategy and performance.
- Engage in regular communication with stakeholders: This will foster trust and transparency, and allow for open dialogue on investment decisions.
- Consider adopting a more active approach to stakeholder engagement: This could involve hosting investor conferences and providing regular updates on investment performance.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: HMC's mission is to manage Harvard's endowment to ensure its long-term financial sustainability. This requires a diversified and risk-managed investment strategy that can generate strong returns over time.
- External customers and internal clients: HMC's external customers are the beneficiaries of Harvard's endowment, including students, faculty, and alumni. Internal clients include the Harvard Corporation, which is responsible for overseeing HMC's activities.
- Competitors: HMC faces competition from other institutional investors, including university endowments, pension funds, and sovereign wealth funds. To remain competitive, HMC needs to adopt a sophisticated investment strategy and manage its risks effectively.
- Attractiveness ' quantitative measures: The recommendations are expected to improve HMC's returns and reduce its risk, leading to improved financial performance and increased shareholder value.
6. Conclusion
By implementing these recommendations, HMC can address its challenges and position itself for long-term success. A diversified investment portfolio, a robust risk management framework, and improved transparency and communication will help HMC generate strong returns, manage risks effectively, and build trust with stakeholders.
7. Discussion
Alternatives not selected:
- Maintaining the status quo: This would involve continuing with HMC's current investment strategy and risk management practices. However, this would likely lead to continued underperformance and increased scrutiny from stakeholders.
- Liquidating the endowment: This would involve selling all of Harvard's assets and distributing the proceeds to beneficiaries. However, this would be a drastic measure that would jeopardize Harvard's financial future.
Risks and key assumptions:
- Market risk: The recommendations assume that HMC can successfully navigate market volatility and generate strong returns over time. However, there is no guarantee that markets will continue to rise, and HMC could experience losses in the future.
- Operational risk: The recommendations assume that HMC can effectively implement its new investment strategy and risk management framework. However, there is always a risk of operational failures, which could lead to losses.
Options Grid:
| Option | Advantages | Disadvantages | Risk |
|---|---|---|---|
| Diversify investment portfolio | Higher returns, reduced risk | Increased complexity, potential for lower returns in certain asset classes | Market risk, operational risk |
| Enhance risk management framework | Improved risk management, reduced losses | Increased costs, potential for over-regulation | Operational risk |
| Improve transparency and communication | Increased trust, improved stakeholder relations | Increased costs, potential for negative publicity | Reputation risk |
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the specific steps that HMC will take to implement the recommendations, including timelines, resources, and responsibilities.
- Engage with stakeholders: HMC should communicate its plans to stakeholders and solicit their feedback.
- Monitor progress and make adjustments: HMC should regularly monitor the progress of its implementation plan and make adjustments as needed.
By taking these steps, HMC can successfully implement its new strategy and position itself for long-term success.
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Case Description
In February 2010, Jane Mendillo, CEO of Harvard Management Company, was reflecting on the list of issues facing Harvard University's endowment in preparation for the upcoming board meeting. The recent financial crisis had vividly highlighted several key issues including the adequacy of short-term liquidity, the effectiveness of portfolio risk management, and the balance of internal and external managers.
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