The Harvard Gazette sat down with Jane Mendillo, the president and CEO of the Harvard Management Company (HMC), to discuss the opportunities and importance of being a global investor.
GAZETTE: What’s new at HMC [Harvard Management Company]?
MENDILLO: It’s been an active year in the markets and for HMC. We are seeing a lot of opportunity around the globe. As one example, our natural resources team has been busy in South America, Southeast Asia, the United States and Europe, where we are looking at specific assets in individual markets as well as logistics and commodity flows between continents.
We’re also currently working on new real estate investments, which are more often structured these days through direct deals and joint ventures rather than more traditional limited partnerships. Parts of the U.S. real estate market appear to have hit bottom, and as a result there are some really interesting opportunities and good situations for long-term capital like ours.
Our internal platform, which we have grown in recent years, has been quite active adding value across the board.
GAZETTE: Markets around the world have been erratic. How is HMC managing this turbulence?
MENDILLO: Since the beginning of our fiscal year it’s been a pretty big roller-coaster ride in the markets. From July 1st through mid-October, equity markets had a sharp downward correction, spurred by Eurozone problems, the U.S. debt ceiling debate and worries about a China economy slowdown.
By early October the U.S. equity market was down nearly 20 percent, European markets were down 30 percent, and natural gas was down 25 percent. It seemed a bit like the summer and fall of 2008.
As the year progressed, some of those anxieties seemed to abate and the markets turned around and headed in a positive direction from November to March. The last couple of months, however, have been choppy.
The endowment has felt these moves. But in contrast to 2008, we have more room to pursue new opportunities. We are in a better liquidity situation, and we’re taking advantage of some of the miss-pricings that come out of those types of sharp dislocations.
GAZETTE: What role has the revamped risk management that you put in place played?
MENDILLO: We have a very good handle on the individual and overlapping risks in our portfolio. Even with more correlated markets and asset classes, we have had a good sense of the direction of our portfolio at all times as we continually monitor and adjust our exposures and our hedges.
GAZETTE: What is your view on the Eurozone and China?
MENDILLO: Every day we see news of the challenges in the Eurozone. And with all the recent changes in leadership in Europe, and the recent election in France in particular, I think that the markets are justifiably anxious again about the economic future of this region.
China’s been a driver of the global growth picture over the last few years, and what happens in China — both in terms of economic growth and political direction — is going to have implications for other markets, from Europe to the U.S. to South America.
GAZETTE: Recently, you’ve talked about the importance of becoming more global and being engaged there. Why is it important? And what are some of the steps you’ve been taking to become more global?
MENDILLO: The U.S. is the largest economy in the world and there are still some great investment opportunities here. But the gap between the U.S. and others is not as large as it was. If our portfolio is to grow in concert with the University’s needs, we need to be constantly searching for new investment ideas both inside and outside of our domestic market. We’ve broadened and deepened our investigations in recent years in order to make sure we are uncovering the best opportunities in rapidly evolving areas like Brazil, China, Eastern Europe and emerging economies around the world.
We are fortunate to have a very strong team with a naturally global perspective, coming from a variety of backgrounds and experiences. In addition, over the last year, we’ve had someone from our group on the ground in China, charged with increasing due diligence and strengthening our exceptional network in China and other parts of Asia. This has been a valuable endeavor and we plan to continue this up-close approach to evaluating important but far away investment arenas.
GAZETTE: What markets do you think have the most potential around the world right now?
MENDILLO: I was recently in Brazil seeing managers in Rio de Janeiro and São Paulo and I’m excited about our holdings and the opportunities there. While Brazil is still considered an emerging market, it has a really strong and vibrant economy, lots of natural resources, and a growing consumer base. We believe there is great potential for that economy and related businesses to grow. In addition, there is an experienced and sophisticated group of investors in Brazil with lots of runway still in front of them.
GAZETTE: Any other markets?
MENDILLO: We’re getting more in-depth in China and Asia more broadly. Given our network of alumni and other partners, we believe Harvard can be one of the most successful investors in China and greater Asia, if we give it the right level of focus and attention. We don’t necessarily want to have the most money there – but we want to have the smartest money there.
GAZETTE: There has been recent interest on campus related to responsible investing practices. How does HMC think about this?
MENDILLO: HMC’s singular mission is to generate strong long-term investment returns to support the educational and research goals of Harvard University. At the same time, we are, by the nature of our long-term mission, concerned with sustainability. Such an extended investment horizon gives us an edge relative to other investors and also compels us to think in decades, not months or years, when assessing the costs and benefits of our investment decisions and operating model.
As a result, all of our investments are thoroughly vetted for their potential returns, their risks, and also for their sustainability. Our due diligence process includes critical evaluation of issues related to environment, labor practices and corporate governance. Investments that fall short in any of these areas are unlikely to generate the strong long-term returns we require. Our entire focus is on growing the endowment in a sustainable way, so that it can provide capital to support the long-term goals of the University, including Harvard’s progressive and generous financial aid policies.