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Harvard Management Company Case Study Essay

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Financial Markets Q1. HMC’s aims to provide relatively predictable cash flows from the endowment to the different schools within the university. As stated in the case, “the general objective was to preserve the real value (adjusted for Harvard’s expense growth) of the endowment and its income distribution in perpetuity”. In recent years, the payout ratio (Endowment spending as a % of total Endowment value) has had a target range of 4.5% to 5.0%. In the case’s example, the average growth rate of Harvard’s expenses is 3% above CPI inflation rate and annual gifts to the endowment average about 1.5%. Hence, with a payout ratio target of 4.75%, we would get an Expected Return of 6.25%: 4.75% + 3% - 1.5% = 6.25% Q2. The Policy …show more content…

Not paying any management fees or transaction costs for the proportion of the overall portfolio managed by HMC could be considered an advantage. Another important factor is Harvard’s triple A credit rating. As given in the case, the credit rating A helped Harvard finance large positions and place HMC as a preferred counterparty for swap transactions, which was “sometimes a key link in the overall process.” Furthermore, HMC employed a compensation system that not only helped to attract and retain some of the most adept portfolio managers in the market, but also permitted to align the economic objectives of portfolio managers with those of the university. In other words, the structure and compensation system of HMC was designed specifically to achieve its objectives and to maintain the real long-term value of Harvard’s endowment Q4. In exhibit 9, it compares the returns of the Harvard Endowment to the Harvard Policy Portfolio, and to TUCS Median (Large funds (mostly pension funds). Overall the average annual differences in returns over the past 9 years between the Harvard Endowment and the TUCS Median have been 5.2%. This can further be broken down into excess returns due to asset allocation 2.2% and due to active stock selection 3.0%. Probable reasons for the superior Asset Allocation returns over TUCS median: * TUCS is composed mainly

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