Because of several years of poor performance relative to other major endowments, Harvard has been pressed to alter its strategy. Kayana Szymczak for The New York Times 

Harvard, which has been under intense pressure to rethink its investment approach for its endowment, announced on Wednesday sweeping changes to how its funds would be managed.

Just weeks after becoming manager of Harvard’s $35.7 billion endowment, N. P. Narvekar said the university, which had long managed a large portion of its money internally, would give the bulk of its funds to outside managers and lay off roughly half of its 230-person staff.

Harvard’s approach to managing its funds was unique in the endowment world. Those funds included a variety of asset classes like equities and real estate and natural resources.

Because of several years of poor performance relative to other major endowments, Harvard has been pressed to alter its strategy. For the 10 years ended June 30, Harvard returned an annual average of 5.7 percent. Columbia, under Mr. Narvekar’s leadership, returned 8.1 percent on average.

While its results were partly attributable to investment decisions, the endowment has also had a series of chief executives come and go. And analysts say some talented investors do not want to work at an endowment or foundation because the compensation will never equal what they can earn running their own funds. Even if an endowment can hire an outstanding investor, once that person has a strong record, he or she may leave for higher pay, and that does not create a stable environment, said Charles Skorina, a recruiter for chief investment officers.

As the head of Columbia’s $9 billion endowment for 10 years, Mr. Narvekar allocated funds to a diverse group of outside managers, an approach that was developed by David F. Swensen and is known as the Yale model.

In a letter on Wednesday, Mr. Narvekar said that the real estate investment team would leave Harvard but that Harvard would continue to invest with it.

As far back as 1998, when Jonathon S. Jacobson left Harvard to form the hedge fund Highfields Capital, that fund raised a third of its initial $1.5 billion from the endowment. Mr. Narvekar also said the staff members running the endowment’s internally managed hedge funds would depart, but he did not say whether Harvard would continue to invest with them.

To help orchestrate the change in strategy, Mr. Narvekar has brought in several new managers, including Richard Slocum, former chief investment officer of the Johnson Company and senior director at the investments office at the University of Pennsylvania. Mr. Narvekar is also hiring three more executives to oversee and monitor Harvard’s diversification and risk profile; two of them previously worked at Columbia’s endowment. Mr. Narvekar left open the possibility of bringing in some internal managers, but stressed that he did not expect a large portion of the portfolio would be managed internally.

In addition, he said that to ensure that there was a more unified approach to investment management, compensation would not be determined by the performance of the single asset class in which a manager is involved, but by the performance of the entire portfolio.

Most accounts of the recent crisis focus on the symptoms and not the underlying causes of what went wrong. But those events, vivid though they remain in our memories, comprised only the latest in a long series of financial crises since our present system of commerce became the cornerstone of modern capitalism. Alchemy explains why, ultimately, this was and remains a crisis not of banking – even if we need to reform the banking system – nor of policy-making – even if mistakes were made – but of ideas.

In this refreshing and vitally important book, former governor of the Bank of England Mervyn King – an actor in this drama – proposes revolutionary new concepts to answer the central question: are money and banking a form of Alchemy or are they the Achilles heel of a modern capitalist economy?

Industry insider John Kay argues that the finance world’s perceived profitability is not the creation of new wealth, but the sector’s appropriation of wealth – of other people’s money. The financial sector, he shows, has grown too large, detached itself from ordinary business and everyday life, and has become an industry that mostly trades with itself, talks to itself, and judges itself by reference to standards which it has itself generated. And the outside world has itself adopted those standards, bailing out financial institutions that have failed all of us through greed and mismanagement.

We need finance, but today we have far too much of a good thing. In Other People’s Money, John Kay shows, in his inimitable style, what has gone wrong in the dark heart of the finance sector.

Between Debt and the Devil challenges the belief that we need credit growth to fuel economic growth, and that rising debt is okay as long as inflation remains low.

In fact, most credit is not needed for economic growth–but it drives real estate booms and busts and leads to financial crisis and depression. Turner explains why public policy needs to manage the growth and allocation of credit creation, and why debt needs to be taxed as a form of economic pollution. Banks need far more capital, real estate lending must be restricted, and we need to tackle inequality and mitigate the relentless rise of real estate prices. Turner also debunks the big myth about fiat money–the erroneous notion that printing money will lead to harmful inflation. To escape the mess created by past policy errors, we sometimes need to monetize government debt and finance fiscal deficits with central-bank money.

How should we compensate the losers from globalisation?


The rise in political “populism” in 2016 has forced macro-economists profoundly to re-assess their attitude towards the basic causes of the new politics, which are usually identified to be globalisation and technology. The consensus on the appropriate policy response to these major issues – particularly the former – seems to be changing dramatically and, as Gavin Kelly persuasively argues, probably not before time.

Unless economists can develop a rational response to these revolutionary changes, political impatience will take matters completely out of their hands, and the outcome could be catastrophic. Unfortunately, while the nature of the problem is coming into sharper focus, the nature of a solution that makes economic sense while also being politically feasible remains embryonic at best (see Danny Leipziger).

Until very recently, the mainstream attitude of economists towards globalisation was straightforward. Free trade was overwhelmingly believed to increase productivity and overall economic welfare, both in developed economies and emerging economies.

Therefore, it was argued that barriers to trade and international capital movements should be reduced as rapidly as possible, wherever they existed. While it was recognised that there could be losers from free trade in the developed economies, these losers were thought to be few and temporary, compared to the gainers, who were many and permanent.

The political upheavals of 2016 have forced economists to reconsider. The final shape of what is now called “populism” is not yet entirely clear. It does not seem to fit easily on the traditional right/left, or liberal/conservative, spectrum. This is why two of the most obvious benefits of the political revolution, Theresa May and Donald Trump, are hard to categorize in this regard [1].

There does, however, seem to be one unifying theme and that is a resurgence in economic nationalism, with a collapse in support for internationalism or globalisation. Since the “elites” are seen as the main beneficiaries of globalisation in the developed economies, this has gone hand in hand with anti-elitism and a rejection of advice from “experts”. The latter could easily develop into anti-rationalism, which would surely prove disastrous in the long term.

Economists have now recognised these dangers, and a new consensus has started to emerge. There has been (almost) no change in the overwhelming belief that free trade and globalisation are good things for society as a whole. But it is now much more widely accepted that the losers from these changes can be more numerous, more long lasting and more politically assertive than previously thought.

The new consensus holds that the gains from globalisation can only be defended and extended if the losers are compensated by the winners. Otherwise, pockets of political resistance to the process of globalisation will begin to overwhelm the gainers, even though the latter remain in the majority [2].

While the compensation principle seems clear enough, the complexity of actually getting it done is much greater. As Jared Bernstein says, the rust belt needs help, but it is not clear how to help the rust belt. Nor is it at all obvious that there would be a political or economic consensus supporting some of the most obvious measures that could be adopted, at least on the scale that would be needed to make a noticeable difference.

The main gainers from globalisation have been twofold: unskilled labour in the emerging world, and those at the upper end of the income scale in the developed economies. The main losers have been industrial workers in the developed world. (See Mark Carney for some compelling evidence on this topic.) The most direct “solutions” to the problem would presumably be to take measures that would reverse these changes in income distribution, either globally or within the boundaries of the developed world.

This is why President-elect Trump has focused protectionist proposals on imports from Mexico and China, which are clearly the most important threats to the manufacturing sector in the United States. Unfortunately, tariffs on manufactured imports from these two countries are likely to displace production to other emerging economies, not to the industrialized regions of America.

Furthermore, a more general restriction on all manufactured imports into the US would raise prices to American consumers, cause disruptions to domestic output as key imported components became scarce, and worsen the productivity crisis that is already serious enough anyway. This would also redistribute income away from workers in the emerging world, who are still low paid by global standards. That would not deserve to command general consent in the political process, but there is a rising danger that it could happen anyway.

What about compensating the losers by redistributing income away from those who have gained inside the developed economies, mainly at the upper end of the income scale? That approach might be seen to respect the principles of natural justice, since it would reverse the “windfall” redistribution in income and wealth caused by free trade.

It does, however, run into very familiar difficulties with a generalized redistribution of this type. It would be difficult to distinguish between those who have lost from globalization, and those who have hit upon hard times for other reasons, including the results of their own choices. And it would undermine economic incentives to take risk and promote expansion.

The principle of compensation for loss already operates through the tax and benefits system, and it could be argued that this already provides the safety net that society has seen as optimal in the past. Why does this new source of loss merit a new and larger form of compensation than previously provided against other economic shocks, like recessions and shifts in the composition of demand away from certain types of production?

One answer to this question is that the losers from globalization tend to be concentrated in particular regions, like the American rust belt and Northern England. It is particularly hard for people in these regions to recover. This would argue for regional transfers, away from more successful regions like the coastal states in America, and London in the UK. These ideas have been tried in the past, without any great success, even when implemented in large scale, such as the transfers made to East Germany after the Berlin Wall came down (see Paul Krugman).

Is this a counsel of despair? No, but it does warn of great difficulties ahead, and of the dangers (entirely ignored by candidate Trump) of raising false hopes in the afflicted regions.

Some progress is certainly being made. Lawrence Summers calls for “responsible nationalism”. Maurice Obstfeld, the outstanding Chief Economist at the IMF, has outlined a long list of appropriate policy measures, including programmes of retraining for the unemployment, regional infrastructure spending, etc. [3]

But while he calls for “trampoline” policies that offer a springboard to new jobs, rather than “safety net” policies, these interventions are rather familiar to Obama-style liberals. Meanwhile the Republicans in the US and the Conservatives in Britain seem to have decided to go down a very different path. Liberal economic solutions, while attractive to the IMF, have the wrong set of politicians in power.

If we cast our minds back 12 months, no one predicted Brexit or Donald Trump’s victory. Politics is moving fast, and economics needs to catch up. How to compensate the losers from globalisation will be the big story in macro in 2017.



[1] A “populist” uprising would not normally be expected to lead to a large and immediate reduction in corporate tax rates, which is the most obvious consequence of Brexit and Trumpism in their early days. This surprising development shows how difficult it will be for investors to predict the policy changes that “populism” will bring.

[2] The victory of Donald Trump over Hillary Clinton was an obvious case in point. Trump won because he attracted disproportionate support in the rust belt states, while Clinton attained an overall majority of the popular vote. This was a good example of the age-old electoral principle that a few large losses can have a greater effect on electoral outcomes than a huge number of small gains.

[3] The policy menu suggested by Maurice Obstfeld includes: retraining, education, infrastructure, health investment, better housing, lower barriers to entry for new businesses, partial wage insurance for displaced workers, the earned income tax credit, and international co-ordination against tax avoidance.

There is a fundamental difference in short-term and long-term investing that is well understood by insurance companies, pension funds and endowments.

Unfortunately, financial markets are generally set up to sell products to investors. Investments are designed and marketed using sophisticated techniques. Real-time prices, graphs, colours and flashing numbers grab our attention. Short-termism rules. ‘Star managers’ are feted when succeeding, but rubbished after a period of failure. Investment professionals, effectively media personalities, are regularly interviewed to tell us ‘what will happen’ to markets, assets, currencies and countries.

The reality is this: no-one knows where individual markets or assets will go. Yet the financial services industry promotes false certainty and encourages short-term behaviour, because the industry benefits from maximising turnover.

In fact, most investors are long-term investors: they want their carefully raised capital patiently invested for some time in the future when they need it back. The rules for long-term investing are quite different, and the returns should be substantially higher.

LIO can help you understand the differences; who you are, and how you can take maximum advantage of this knowledge.

Today, more than ever before, we need to reply on trusted experts in their respective fields. Financial services contains such expertise. Some are willing and able to share their knowledge, not merely for profit but also to raise standards, share insights, and ensure that participants in the wider economy benefit.

In financial services and asset management, the ‘trust gap’ has never been greater. We should put the provision of expertise and excellence ahead of profit to regain that trust.

LIO seeks to give advice and provide management expertise to this exacting standard.

There is a wide spectrum of quality and depth of capability in asset management, as in financial services generally. In the ‘premier league’ of investing, the main beneficiaries, in addition to clients, are the asset manages themselves.

The client spectrum is sorted by size, direct knowledge and influence. Starting at the ‘top of the mountain’, hedge fund, private equity and proprietary managers have the greatest access to investments and returns, managing their own capital.

Following these are a range of professional investors. These include sovereign or quasi-sovereign pools of capital, the ‘SWF’s; large public pension funds; insurance companies; corporate and municipal Pension funds; and collective private pension plans.

Next are individual, ‘consumer’ investors. They may be advised, as clients of a private banks or established wealth managers, or they may be self-directed. Self-directed investors rely on advertised advice or recommendations.

It will be no surprise that the services available tend to decline in quality and range, and increase in pro-rata price, as one goes down the spectrum. Some top-tier investors are paying private equity, venture capital and hedge funds the highest fees of all, but relative to their excess returns, they can afford it.

Within the above lie smaller Pension Funds, Endowments, Foundations & Charities. Their access to the best quality of advice can be quite limited by resources, contacts, or size.

Arguably though, they are in the greatest need of the best available advice. They are usually agents, managing other people’s money. That money is often bequeathed or donated, often for a highly-valued good cause. The trustees or governing boards of these groups may have limited professional financial experience.

LIO seeks to bring top-tier advice and management to this group of investors.

They were masters of the financial universe, flying in private jets and raking in billions. They thought they were too big to fail. Yet they would bring the world to its knees.

Andrew Ross Sorkin, the news-breaking New York Times journalist, delivers the first true in-the-room account of the most powerful men and women at the eye of the financial storm – from reviled Lehman Brothers CEO Dick ‘the gorilla’ Fuld, to banking whiz Jamie Dimon, from bullish Treasury Secretary Hank Paulson to AIG’s Joseph Cassano, dubbed ‘The Man Who Crashed the World’.

Through unprecedented access to the key players, Sorkin meticulously re-creates frantic phone calls, foul-mouthed rows and white-knuckle panic, as Wall Street fought to save itself.

Never before have investors and policy makers been beset by so many conflicting messages about the economy and the markets. While most pundits dismiss the conflicts as “noise” in the system, Mohamed A. El-Erian, president and CEO of the $35 billion Harvard Endowment and incoming co-CEO and co-CIO of PIMCO, one of today’s most successful investment firms, avers that those messages signal deep, structural changes and realignments that are radically redefining the investment game.

Written by the man who Fortune magazine refers to as a “Global Guru,” When Markets Collide offers a cogent picture of the rapidly changing world financial system. A book that is sure to become an overnight investment classic, it gets you up to speed on the new economic and investing landscape and provides a detailed blueprint for capitalizing on the phenomenal opportunities now available in that new investment landscape, while minimizing the new and challenging set of risks.