In The Headlines

Harvard Learns an Expensive Lesson about Investment Risk

Retail ApocalypseSix years ago, Jane Mendillo, then head of Harvard’s endowment, spent a week in Brazil, flying in a turboprop plane to survey some of the university’s growing holdings of forest and farmland. That year, Harvard began one of its most daring foreign adventures: an investment in a sprawling agricultural development in Brazil’s remote and impoverished northeast. There, workers would produce tomato paste, sugar, and ethanol, as well as energy after processing crops. The profits, in theory, could outstrip those of conventional stocks and bonds and keep the world’s richest university a step ahead of its peers.

Harvard bet big in Brazil and lost. The university, which invested at least $150 million in the development, is now exiting. The venture contributed to the decision by its current endowment chief, N.P. Narvekar, to write down the value of its globe-spanning natural resources portfolio last year by $1.1 billion, to $2.9 billion. Harvard, which manages $37.1 billion, has said those investments produced strong returns but now face “significant challenges.”

Harvard made many mistakes over the last decade, according to Thomas Gilbert, a finance professor at the University of Washington, but almost all of them boiled down to a single miscalculation: the belief that its top money managers—who were paid $242 million from 2010 through 2014—were smarter than everyone else and could handle the risks almost all other endowments avoided. “They became loose cannons,” Gilbert says. “When you’re managing donor money, it’s appalling.” Harvard over the past decade ended June 30 posted a 4.4 percent average annual return, among the worst of its peers. It even lagged the simplest approach: Investing in a market-tracking index fund holding 60% stocks and 40% bonds, which earned an annual return of 6.4%. Some of Harvard’s blunders have been well-chronicled. Facing heavy losses after the financial crisis in 2008, Mendillo sold private equity stakes at deep discounts before they could recover. Her successor, Stephen Blyth, experimented with expanding the endowment’s in-house team of stock traders before retreating in the face of tens of millions of dollars of portfolio losses. Blyth stepped down in 2016.

But perhaps no bet damaged Harvard more than its foray into natural resources. The university invested in central California vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania. Harvard has been reevaluating and selling some of those investments, such as part of the Uruguayan plantation it sold to insurer Liberty Mutual last year. “The natural resources portfolio was supposed to be the crown jewel,” says Joshua Humphreys, president of the Croatan Institute, a nonprofit that focuses on sustainable capitalism. “But they were known for taking outsize risks, and those can cut both ways.”

Such investments have not always lost. Mendillo took the lead flipping U.S. timberland in the 1990s, delivering substantial profits when she worked for then-endowment chief Jack Meyer. Harvard similarly scored big gains when it bought and sold timberland in New Zealand in 2003. When Mendillo returned to Harvard after managing Wellesley College’s endowment, she tried for a reprise. This time she thought U.S. timber was expensive. Instead, Harvard could tap forestry Ph.D.s and other sharp minds to find opportunities in emerging markets, taking advantage of growing demand for scarce resources around the globe.

Mendillo saw these investments as decades-long wagers, which her board embraced. “Natural resources is our favorite area,” she told a July 2012 investor conference. At the time, Brazil’s economy was booming, and the government was pouring development money into the impoverished, rugged, semi-arid northeast. The university, working with Brazilian private equity firm Gordian BioEnergy, established a company called Terracal Alimentos e Bioenergia, according to tax filings and people familiar with the matter. Terracal planned to spend more than 5 billion Brazilian reals ($1.5 billion) on the agricultural complexes. The first development would transform thousands of acres around the remote town of Guadalupe on the Parnaiba River using modern irrigation technologies. By the time Mendillo stepped down as endowment chief executive officer in 2014, the economy in Brazil was slowing, and a government corruption scandal was deepening, spooking Harvard and other foreign investors.

The strategy paid off for one constituency: Harvard’s money managers. Alvaro Aguirre, who oversaw natural resources investments, made $25 million over four years, tax records show. His boss, Andrew Wiltshire, was paid $38 million over five years. Both have since left Harvard. Mendillo earned as much as $13.8 million in a single year. Narvekar, who took over in 2016, has decided to shift most of Harvard’s investments to outside managers. While considering further write-downs of natural resources investments, he has indicated that he may continue to hold some if they are a good value now. A group of alumni from the class of 1969 recently had a suggestion for Narvekar: Invest in index funds.

Citations

  1. https://bloom.bg/2CQgbrj – BusinessWeek
  2. http://bit.ly/2FQ4NyN The Harvard Crimson

Airbnb Embraces the Enemy

Casinos and MillenialsSix years ago, Jane Mendillo, then head of Harvard’s endowment, spent a week in Brazil, flying in a turboprop plane to survey some of the university’s growing holdings of forest and farmland. That year, Harvard began one of its most daring foreign adventures: an investment in a sprawling agricultural development in Brazil’s remote and impoverished northeast. There, workers would produce tomato paste, sugar, and ethanol, as well as energy after processing crops. The profits, in theory, could outstrip those of conventional stocks and bonds and keep the world’s richest university a step ahead of its peers.

Harvard bet big in Brazil and lost. The university, which invested at least $150 million in the development, is now exiting. The venture contributed to the decision by its current endowment chief, N.P. Narvekar, to write down the value of its globe-spanning natural resources portfolio last year by $1.1 billion, to $2.9 billion. Harvard, which manages $37.1 billion, has said those investments produced strong returns but now face “significant challenges.”

Harvard made many mistakes over the last decade, according to Thomas Gilbert, a finance professor at the University of Washington, but almost all of them boiled down to a single miscalculation: the belief that its top money managers—who were paid $242 million from 2010 through 2014—were smarter than everyone else and could handle the risks almost all other endowments avoided. “They became loose cannons,” Gilbert says. “When you’re managing donor money, it’s appalling.” Harvard over the past decade ended June 30 posted a 4.4 percent average annual return, among the worst of its peers. It even lagged the simplest approach: Investing in a market-tracking index fund holding 60% stocks and 40% bonds, which earned an annual return of 6.4%. Some of Harvard’s blunders have been well-chronicled. Facing heavy losses after the financial crisis in 2008, Mendillo sold private equity stakes at deep discounts before they could recover. Her successor, Stephen Blyth, experimented with expanding the endowment’s in-house team of stock traders before retreating in the face of tens of millions of dollars of portfolio losses. Blyth stepped down in 2016.

But perhaps no bet damaged Harvard more than its foray into natural resources. The university invested in central California vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania. Harvard has been reevaluating and selling some of those investments, such as part of the Uruguayan plantation it sold to insurer Liberty Mutual last year. “The natural resources portfolio was supposed to be the crown jewel,” says Joshua Humphreys, president of the Croatan Institute, a nonprofit that focuses on sustainable capitalism. “But they were known for taking outsize risks, and those can cut both ways.”

Such investments have not always lost. Mendillo took the lead flipping U.S. timberland in the 1990s, delivering substantial profits when she worked for then-endowment chief Jack Meyer. Harvard similarly scored big gains when it bought and sold timberland in New Zealand in 2003. When Mendillo returned to Harvard after managing Wellesley College’s endowment, she tried for a reprise. This time she thought U.S. timber was expensive. Instead, Harvard could tap forestry Ph.D.s and other sharp minds to find opportunities in emerging markets, taking advantage of growing demand for scarce resources around the globe.

Mendillo saw these investments as decades-long wagers, which her board embraced. “Natural resources is our favorite area,” she told a July 2012 investor conference. At the time, Brazil’s economy was booming, and the government was pouring development money into the impoverished, rugged, semi-arid northeast. The university, working with Brazilian private equity firm Gordian BioEnergy, established a company called Terracal Alimentos e Bioenergia, according to tax filings and people familiar with the matter. Terracal planned to spend more than 5 billion Brazilian reals ($1.5 billion) on the agricultural complexes. The first development would transform thousands of acres around the remote town of Guadalupe on the Parnaiba River using modern irrigation technologies. By the time Mendillo stepped down as endowment chief executive officer in 2014, the economy in Brazil was slowing, and a government corruption scandal was deepening, spooking Harvard and other foreign investors.

The strategy paid off for one constituency: Harvard’s money managers. Alvaro Aguirre, who oversaw natural resources investments, made $25 million over four years, tax records show. His boss, Andrew Wiltshire, was paid $38 million over five years. Both have since left Harvard. Mendillo earned as much as $13.8 million in a single year. Narvekar, who took over in 2016, has decided to shift most of Harvard’s investments to outside managers. While considering further write-downs of natural resources investments, he has indicated that he may continue to hold some if they are a good value now. A group of alumni from the class of 1969 recently had a suggestion for Narvekar: Invest in index funds.

Citations

  1. https://bloom.bg/2CQgbrj – BusinessWeek
  2. http://bit.ly/2FQ4NyN The Harvard Crimson

The Good News Is . . .

Good NewsA measure of U.S. manufacturing activity increased faster in February, extending a growth streak that stretched into 18 months. The Institute of Supply Management’s manufacturing index jumped to 60.8 in February, up from the 59.1 reading recorded the month before. Economists from Reuters expected manufacturing growth to slip to 58.7 in February. A reading above 50 for the index indicates expansion in the manufacturing sector, and a reading below 50 signals contraction.

Analog Devices Inc., the leading global supplier of high-performance analog technology, reported earnings of $1.42 per share, an increase of 10.1% over year-earlier earnings of $1.29 per share. The firm’s earnings topped the consensus estimate of analysts by $0.13. The company reported revenues of $1.5 billion, an increase of 54.3%. Management attributed the results to strength in its business-to-business segments and expanding market share.

Amazon said it had acquired Ring, a maker of internet-connected doorbells and cameras, pushing more deeply into the home security market. The deal is worth around $1.1 billion. Ring is best known for a doorbell with a security camera inside. The device allows homeowners to monitor visitors at their front door through an app on their phone, even if they are not at home. Amazon has made home automation a major focus because of the success of its Echo family of products, which allow users to control thermostats, surveillance cameras and other connected devices using voice commands. Amazon’s Echo Spot device already works with Ring doorbells, allowing people to look at footage from the cameras on the Echo Spot’s screen. Buying Ring suggests that Amazon has more ambitious plans for the product than it could achieve through a technology partnership.

Citations

  1. https://bloom.bg/2eVhfSb – Bloomberg
  2. http://cnb.cx/2lwnm3s – CNBC
  3. http://bit.ly/2oL9VvT – Analog Devices Inc.
  4. http://nyti.ms/2FhovVZ – NY Times Dealbook

Planning Tips

Guide to Using 529 Plans Under the New Tax Law

Estate PlanningA 529 college savings plan allows you to save for your child’s or grandchild’s education with a savings plan or prepaid tuition plan and withdraw the funds tax-free when needed. There is no limit to the number of plans you can contribute to or the number of accounts you can be open for any child. Each state’s rules are different so you will need to do your homework. If you are already contributing to a 529 plan, with the reduced deductions in the new 2018 tax law, you may want to increase your contributions—or even create a second 529 account—to offset higher state taxes. If you have not yet opened a 529 account, this year’s important changes in tax and 529 regulations have made them an even more valuable option for parents (or grandparents) of school-aged or college-aged children. Below are some of the benefits of a 529 plan. Be sure to consult with your financial advisor to determine if a 529 plan is appropriate for your situation.

K-12 Tuition Can Now Be Funded With a 529 Plan – All 529 plans were originally created to let you save and invest for your child’s college education while paying no federal tax on qualified withdrawals. The good news is this benefit has now been expanded: you will be able to withdraw up to $10,000 per year per student for elementary, middle and high school education expenses if your child attends a private or religious school. And, if you have already been saving for K-12 with a Coverdell Education Savings Account (ESA), you can roll over that account to a 529 plan without tax consequences.

Saving by Off-Setting State Taxes – The new 2018 tax law limits deductions for your state income and property taxes to $10,000, so you might find yourself paying more state tax this year. But if you live in one of the 34 states that offer a state tax deduction for contributions to a 529 plan, you can lower your state taxes by contributing more to your 529. In most states, you have to be enrolled in that state’s own plans to take the deduction, but several states, such as Utah, Vermont, and Indiana, allow you to deduct contributions from any state plan. If you live in one of the several states whose 529 plans include state tax credits, you could also find yourself paying considerably less.

Enhancing the Benefits for Younger Children – A 529 plan allows “front-loading,” a term for making up to five years of contributions at once. This not only allows you to catch up for a child already in elementary or secondary school, it also allows you to maximize state tax deductions or credits. And anyone can make contributions to your child’s 529 plan. Friends and relatives can each contribute up to $15,000 per recipient. They can also front-load up to five years of contributions while maximizing their own tax savings. Additionally, if they make direct payments to services provided for beneficiaries’ tuition or medical expenses, these expenses would be tax-free, even though the costs surpass the annual gift tax exclusion.

New Benefits for Special Needs Students – The new tax law allows assets in 529 accounts to be transferred to ABLE accounts without any penalties as long as they are transferred by 2025. ABLE plans, named for the Achieving a Better Life Experience Act, are designed to provide tax-favored savings for people with disabilities without limiting their access to benefits such as Medicaid, Social Security disability insurance (SSDI) and Supplemental Security Income (SSI). The annual contribution cap for ABLE plans is $15,000, and an ABLE account can reach $100,000 without affecting SSI benefits. You can also make tax-free withdrawals from ABLE accounts when paying for expenses such as housing, legal fees, and employment training.

Transferring Unneeded Funds – Given all the benefits brought by 529 plans, you might already have substantially contributed to an account. What if your child decides not to receive the planned education or is able to pay for it through scholarship? If you no longer need the account for the child it was created for, you can change the plan’s beneficiary to another family member, saving you the income tax on 529 earnings and the 10% federal penalty you pay if you withdraw money for non-educational purposes.

Citations

  1. http://bit.ly/2FjeswZ – US News & World Report
  2. http://cnb.cx/2DPAb2j – CNBC
  3. http://bit.ly/2oCIFAk – Investopedia
  4. http://bit.ly/2FizM8M – SavingForCollege.com
  5. http://bit.ly/2F53GtB – Forbes