Harvard fund earns 19.2% return

In his final year running Harvard University's endowment, Jack Meyer did what he did consistently in his 15 years as president of Harvard Management Co.: He turned in investment results that beat the benchmarks.

Harvard yesterday said the endowment earned a 19.2 percent return in the year ended June 30, 2005, above the 15.8 percent median return of the nation's 25 biggest university endowments. The endowment's total value rose to $25.9 billion, up from $22.6 billion the year before.

Meyer, who said in January he would resign to start his own investment firm, worked his final day yesterday. He won't be leaving Harvard empty-handed. James Rothenberg, chairman of Harvard Management, said the endowment would give Meyer's new firm up to $500 million of the university's money to manage.

''Jack and his team are good guys and good managers," Rothenberg said. ''Why shouldn't Harvard continue to benefit from their success?"

Harvard has yet to name a permanent successor to Meyer. The university yesterday said Peter Nadosy, former president of Morgan Stanley Asset Management, would serve as chief investment officer until a new chief executive has been chosen. Rothenberg said the university was close to filling Meyer's job, but he declined to commit himself to a specific timetable. Meyer was not available to comment yesterday.

In September The Boston Globe reported that the job had been offered to Mark Nunnelly, a manager director at Bain Capital in Boston, who turned down the job. Neither Harvard nor Nunnelly commented on the story.

Meyer's new firm will specialize in fixed-income investments. Some of Harvard's top bond managers, including David Mittelman and Maurice Samuels, will join the firm, Convexity Capital Management. Mittelman and Samuels have routinely outperformed other bond managers by a wide margin over time.

In the past, the university has invested endowment money with money managers who left Harvard to set up their own companies. Meyer defended the practice as a way for Harvard to continue to work with the most talented money managers.

Meyer's tenure was marked by one ongoing controversy: the big paychecks he and some of his money managers collected. Meyer earned as much as $7 million in a year. His top-performing managers earned as much as $35 million. Meyer, who designed the compensation system, said the multimillion-dollar bonuses made sense because they let Harvard hang on to managers who otherwise would have defected to hedge funds. He insisted the system enabled the university to earn strong returns for a reasonable cost.

A small group of alumni regularly criticized the compensation paid to Meyer and his staff. They said it was inappropriate for a university to pay the kind of salaries earned on Wall Street and in Hollywood.

Harvard currently manages about 50 percent of the endowment internally, an unusual practice. Rothenberg said the percentage would drop further as bond money is allocated to outside managers. He said the endowment would review its policies on internal management and compensation once Meyer's successor is selected. ''All of that is to be worked out with the new CEO," he said.

When Meyer joined Harvard Management in 1990, the university had a $4.7 billion endowment. Some of the gains since then can be attributed to the strength of the stock and bond markets in the 1990s. But Meyer's management made a difference. His insistence on diversification led Harvard to put money into a range of investments including hedge funds, venture capital, and commodities. When the stock market collapsed in 2001 and 2002, Harvard and other big endowments largely avoided the downturn.

Over the past 10 years, Harvard's endowment earned an average return of 16.1 percent a year. That compares to a median return of 9.4 for institutional investors and 12.5 percent for the 25 largest endowments. According to the university, if the endowment had earned that typical 9.4 percent return, Harvard would have $14.4 billion less in endowment assets than it actually has today.

Over time, the endowment has contributed a rising tide of dollars to the university's operations. In 1995 the endowment provided 21 percent of Harvard's total income. Last year it accounted for 31 percent of income. The money allowed Harvard to double its grants to students between 1998 and 2004.

Charles Stein can be reached at stein@globe.com.