Harvard Management

Company
Case Presentation

BY:
Bharath
Parameswaran
Kinshuk Goel
Preemnath Katare
 Harvard Management
Company
Established in 1974, separate entity
and a non profit organization
Portfolio included pension assets,
working capital and other assets
worth of $19B
HMC manages 68% of its endowment
assets internally
Active Strategy provided real return
of 11.3%
 HMCs policy portfolio
Determines the long run asset
allocation portfolio
It is structured to full fill the growth
of Harvards endowment
An average real return of 6-7% is
estimated to achieve this portfolio for
the Harvard University
Historical data is used and analyzed
 Policy Analysis
Long run allocation of funds to
different asset classes.
Bench mark to gauge the
performance of HMC.
Investment consists of 11 asset
classes.
 Characteristic considered for asset to be
included in the portfolio.
Expected future real returns.
Volatility of real returns.
Correlation of real return on each asset class.
Use of Mean-Variance Analysis.
It determines the optimal allocation to
different asset classes that minimizes
portfolio return variance given the expected
portfolio return.
The HMC uses the output Efficiency Frontier
to chose the asset for investment.
 Type of Asset Policy (Weightage in %)
Domestic Equity 32
Foreign Equity 15
Emerging Markets 9
Private Equity 15
Absolute Return 4
High Yield 2
Commodities 5
Real Estate 7
Domestic Bonds 11
Foreign Bonds 5
Cash -5
 The Policy Portfolio changes in
response to..
Changes in goal or risk tolerance.
Changes in capital market assumptions.
Introduction of a new asset class.
Inflation Protected Bonds. (TIPS)
 Treasury Inflation Protection
Securities(TIPS)
Bonds which are linked with inflation
provided by the US Treasury
Issues in 1997
Coupons are paid semi-annually
Offered on a 5,10 and 20 year terms
Principle is marked up to CPI
Considered as marketable securities
 How do TIPS work ?
Coupon payment changes with
principle value
CP = principle x coupon rate
Yields are linked to inflationary
expectation
(EG) If yield treasures is 2.5%, yield
on TIPS is 2% Inflation on TIPS is
expected to be 0.5%
Old Policy Portfolio New Policy Portfolio
 Regular Treasuries vs TIPS
Regular treasuries would be a better
investment if the inflation levels are low
If there is high inflation, TIPS would be a
good investment
The principle amount of TIPS will be
adjusted to the change in CPI
If inflation remains low, TIPS holders will
receive a low returns than of regular
Treasury notes for the same maturity
period
 Conclusion
Seems to be the right time to move
to TIPS
The current real yields on TIPS was 4%,
good for long-term investment horizon.
Good results from mean-variance
analysis
Introducing TIPS of 7% taken from
U.S Equities and U.S Domestic bonds
with no shorting of cash.
Thank you