While we all know that it is important for people to get a good education if they want to do well in today’s economy, it remains the case that who you know matters much more than what you know. Harvard has taught us this lesson well with the management of its endowment in recent years.
Businessweek reported that the returns on Harvard’s endowment over the last decade averaged just 4.4 percent annually. This performance trailed both stock index returns and the returns received by other major university endowments. This means that Harvard would have had considerably more money to pay its faculty and staff if it simply bought a Vanguard index fund.
If this were just bad luck, one could be sympathetic, but according to Businessweek, the school paid $242 million to the people who managed its money over the period from 2010 to 2014, an average of $48.4 million annually. While Harvard’s endowment fared poorly, these money managers did very well, with the top-paid managers undoubtedly pocketing paychecks well in excess of $1 million a year (approximately 8,000 food stamp months). In other words, Harvard’s money managers were paid huge sums to lose the school money. Nice work if you can get it.
It is difficult to understand how Harvard, or any university, could pay so much money to lose the school money. Harvard’s money managers surely have good credentials, and probably even good track records with their past performance. How could the university write contracts that allow these people to get huge paychecks that end up costing Harvard money due to their poor investment decisions?
Unfortunately, universities are not the only ones who often pay big bucks to lose money. Pension funds routinely sign contracts with private equity companies that allow the private equity partners to get rich even if investment returns to the funds are no better, and often worse, than the returns from equivalent stock index funds. The key is to be on the inside: a…