The Harvard Management Company and Inflation Protected Bonds

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The Harvard Management Company and Inflation Protected Bonds

Executive Summary

The Harvard Management Company (HMC) was established in 1974 with the goals providing world-class investment management focused solely on generating strong results to support the educational and research objectives of Harvard University. The company’s goals are to correctly measure Harvard University’s financial requirements and to provide investment opportunities that will accurately meet or exceed them with the lowest amount of risk assumed by the institution.

In order to best meet these investment needs the Harvard Management Company must continually revise the Harvard Policy Portfolio, which denotes how assets will be allocated across all available asset classes. This is necessary because new information in the market allows HMC to be more efficient in their investment strategies. Changes to this Policy Portfolio are made only in response to (1) changes in the goals or risk tolerance of the university as an institution, (2) changes in capital market assumptions, or (3) the appearance of a new asset class in the market.

Recently, reasons 2 and 3 were met in order to call for a new proposal to the Harvard Policy Portfolio. The introduction of Treasury Inflation-Protected Securities into the market in 1997 added new investment opportunities at different risk/return levels. Because these new securities have been producing a protected return higher than what had been the assumption for bonds, previously, new market assumptions must be made.

In order for the Policy Portfolio to remain efficient the HMC must invest in TIPS. The historical information is a small sample, so they should not invest as exuberantly as the optimization calculations suggest, but their investment in TIPS at a rate of 7% should help assist their efficiency.


Jack Meyer, President and CEO of the Harvard Management Company (HMC), Inc., had many times prepared changes to the Harvard Policy Portfolio in order to submit to the Board for approval. This Policy Portfolio determined how the long-run assets of the Harvard Endowment’s portfolio would be allocated in order to achieve the necessary return to fund their activities at the lowest possible risk to their assets. On an average year Mr. Meyer suggested no allocation changes or very small ones recent investing activity caused him to consider much more drastic changes.

The Policy Portfolio changed only in response to any combination of three occurrences: Changes in the goals or risk tolerance of the university, changes in capital market assumptions, or the appearance of a new asset class in the market. In late February 2000, Jack Meyer realized that two of those three occurrences have been realized; there was a new emerging asset class in the market in the form of Treasury Inflation-Protected Securities and with that introduction new capital market assumptions had to be anticipated. Because of this, HMC needed to include the relatively new Treasury Inflation-Protected Securities (TIPS) in their total portfolio in order to remain competitive

Harvard’s endowment was managed mostly internally by Harvard Management Company. This company is a not for profit that was owned by Harvard and created solely to manage the universities now $19.1 billion in assets. Instead of using external sources to manage their money, Harvard created the Harvard Management Company, INC., for many reasons. One of which, specifically, is because they have specific investment goals they need to reach in order to continue to provide the funding for each of the schools in the university. HMC had been given some goals that needed to be met in order for Harvard to continue to operate at its current levels. • Distribute annually between 4% and 5% of the endowment to the schools within the university while maintaining the real asset value of e endowment. • Allow for real growth in...
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