The Harvard Management Company and Inflation-Protected Bonds

The Harvard Management Company and InflationProtected Bonds

Introduction The Harvard Management Company (HMC) is an organization which owned by Harvard University, established in 1974, provided an investment management for the endowment assets of Harvard University. HMC managed more than $19 billion of total asset, including $15.1 billion of endowment funds. In 1990s, the HMC had produced an 11.3% of real return per year after expenses, compared to 2.2% by US Treasury bills, 5.2% by US Treasury bonds, and 15.8% by US equities. Besides, in the same decade, the US inflation went up to a very high position. In 2000, for example, the inflation was 3.38%, 1.12% above the US Treasury bills. If put all investment only into T-bills, an investor would loss more than he earned. Jack Meyer, the President and CEO of the HMC, wanted to make some changes in the Policy Portfolio which determining the long-run asset allocation policy of Harvard University endowment among different asset class. TIPS, the US Treasury Inflation-Protected Securities, was considered to be invested. In this case, we are going to use historical date and mean-variance to analyse these investment of Policy Portfolio. Capital Market Assumptions Since TIPS was a new asset to the portfolio, Jack Meyer and his team used historical data and the rate of expected real return of TIPS to compute with other assets to build the Capital Market Assumptions. Because the Expected Real Return already adjusted by inflation, investors could have a more direct and precise view on the investment excluding the influence of inflation. As we can see on Exhit4, Expected Real Return, standard deviation and Correlations were showed. Both Domestic and Foreign Equity had an Expected Real Return of 6.5%, which lower than their historical averages. This means the risk premiums of Domestic and Foreign equity are going to decrease.

Portfolio Management Analysis Since HMC is a not- for- profit entity, we assume that the HMC is...