9-201-129
REV: OCTOBER 23, 2001

Harvard Management Company (2001)
In February 2001, Jack Meyer gazed out of his fifteenth floor office window at a cold Boston
Harbor and reflected on the set of issues facing Harvard Management Company (HMC). The HMC
Board would soon be reviewing the Policy Portfolio – the long-term asset mix that was designed to balance Harvard’s aversion to risk against its needs for long-term endowment returns. The Policy
Portfolio was the cornerstone of endowment management at Harvard, the “neutral” portfolio mix that anchored the central tendency of actual asset allocations over time, as well as the benchmark against which actual performance was measured and incentive compensation was calculated. The
Board was also interested in a variety of related issues, including the complexity of the investment strategies employed, the effectiveness of their risk controls, and the design and administration of their compensation systems.

The Role of the Endowment
Harvard University had been founded in 1636, and from the beginning its endowment played an important role in the financial structure of the institution. As of June 2000, the endowment managed by HMC totaled approximately $18.2 billion. Each of the various schools within the
University owned “units” in the endowment, much like an individual would own shares in a mutual fund. Spending from the endowment was distributed pro-rata to all schools on the basis of the units each school owned. The annual spending from the endowment represented approximately 27% of the total budget of the University, ranging from 16% for the Business School (because it had only a small endowment relative to its operating budget) to a high of 56% for the Divinity School (because, conversely, it had a relatively large endowment relative to its budget). In fiscal year 2000, total endowment spending by the schools was $556