Harvard’s direct RE strategy makes 20.4%

Implications for real estate fund managers and their traditional commingled funds as Harvard Management makes 20.4 percent from its direct real estate holdings

Harvard Management Company (HMC), an endowment looked up to by industry peers, has revealed how it has made 20.4 percent returns from its direct real estate investment strategy in fiscal year 2014. HMC, which was not active in direct investment before 2010, now has around one-third of its $4.8 billion in property holdings in direct real estate, and said that its new strategy was “working very well.”

Harvard’s latest financial figures are contained in its September 2014 Annual Endowment Report for the year ended June 30 2014 with further details contained within its annual endowment report from chief executive officer, Jane Mendillo. 

The report highlights an overwhelmingly important issue for managers that rely on attracting institutional investors into traditional commingled funds. However, while Harvard’s strategy obviously was working well for it, the question was just how successful going direct is for other institutional investors, especially those without the necessary experience or teams.

In its portfolio, HMC has direct investments, strategic fund managers consistent with its new strategy and legacy investments. It said that, while its direct investments strategy was working well, that is in contrast to its legacy real estate portfolio, which is in run-off mode and returned only 7.8 percent. Its real estate strategic funds portion has delivered 16 percent.

In additional information, HMC revealed that its return since inception of the direct investment program stood at 21.8 percent – beating real estate strategic funds at 15.6 percent and legacy investments at 3.7 percent. “One advantage of our hybrid model is the ability to build teams that can create unique investment opportunities through direct investing,” Harvard stated in the report.

It continued: “We have leveraged this strategy with great success in both our natural resources and real estate portfolios. Direct investing requires specialized teams that can develop sophisticated strategies unique to the markets in which they operate. Direct investing offers the benefits of enhanced transparency, better risk control, greater nimbleness and lower overall cost structure. It also provides disciplined investors the opportunity to take more control over investment timing, entering markets when there is meaningful growth potential and exiting investments when prices are right.”

Finally, it added: “At the end of fiscal year 2014, about 15 percent of our total portfolio was in direct investments in real estate and natural resources. This is in addition to the 25 percent of our portfolio that is traded internally in public markets, for a total of about 40 percent internally managed and 60 percent managed by external managers.”

James Rothenberg, chair of the HMC Board of Directors, said: “Jane (Mendillo) and the HMC team have done an excellent job strengthening the portfolio and investment organization, and we are proud to deliver strong returns to the University. At the same time, HMC’s unique hybrid model has saved the University approximately $2 billion over the last decade as compared to the cost of management for a completely external model.”

The endowment is not a single fund, rather it comprises more than 12,000 individual funds, many of them restricted to specific uses such as support of a research center or the creation of a professorship in a specific subject. The funds are invested by HMC, which oversees the university’s endowment, pension, trust funds and other investments at a significant savings relative to outside management.