Cooperation

When George Putnam '49 replaced George F. Bennett '33 as Harvard's treasurer in 1973, he quickly began thinking about the reorganization of the University's financial structure. Since 1948, State Street Research and Management, a firm headed by Bennett, had handled Harvard's money. Rejecting the possibility of maintaining the status quo. Putnam instead created a hybrid of two other models for managing large funds: splitting up the portfolio among several investment firms, and creating an internal investment management company.

The unique arrangement that emerged was to let Harvard Management Company (HMC), handle most of the endowment and to divide about a third among several outside firms. The idea behind the set-up was not to encourage the separate management units to compete to make the most money, but rather to provide HMC with close ties to the financial world, allowing it to gain advice from the outside firms as well as use them as a yardstick to measure how well it was doing.

Putnam named Walter M. Cabot '55 president of HMC in February 1974, and Cabot soon began interviewing more than 100 interested firms to fill the outside manager postions. He selected five of them that year and commented. "It is my earnest hope that the partnership approach of a close professional relationship will produce better long-term investment results for the entire endowment than the common practice of having separately managed pools with little interrelation with one another or with the group as a whole. At Harvard, we are stressing cooperation rather than competition among managers to produce the best overall results."

Since then, HMC has reduced the number of outside management firms to three, two of the original ones and a new one, which specializing in computerized investment techniques. The three firms handle about $70 million of Harvard's portfolio. "The cooperative system has worked out reasonable well," Cabot observes. "The original idea is still a sound one, but as the management company matures, it needs outside managers with other skills."