HARVARD MANAGEMENT COMPANY AND INFLATION

PROTECTED BONDS

Sessions 6
SESSION PLAN
▷WHAT IS THE ISSUE WE ARE DISCUSSING

▷CONCEPTS

▷CASE SUMMARY

▷WHY 1-2

▷ESTIMATES OF RETURNS

▷RECOMMENDATION?
CONCEPTS
▷Real return

▷Nominal return

▷TIPS

▷Price response of TIPS to changes in expected

and realized inflation, yield and risk of inflation.
US INFLATION
Inflation rate for consumer prices in US over past
61 years was between -0.4% to 13.5%.

For 2021 inflation was 4.7%

For Dec 22 inflation rate was 6.5%

CASE SUMMARY
▷In Jan 1997, US Treasury started auctioning a
new type of Bonds.

▷Treasury Inflation Protected Bonds (TIPS)

▷Australia, Canada, Israel, UK, Sweden had

experimented but US for the first time.

▷Harvard Management Company (HMC) that

oversees the management of a large part of
Harvard University’s endowment is considering
including these assets in the portfolio.
CASE
▷In Feb, 2000, HMC prepared a proposal that
suggested including these bonds as a separate
asset class in the Policy Portfolio, that determines
the long-run asset allocation of the endowment
among different asset classes and serves as a
benchmark to evaluate the performance of the
endowment, and the compensation of portfolio
managers.
QUESTIONS
1 Why does Harvard spend so much
resources in managing its endowment?

▷Why not simply invest it in Treasury Bonds and

be done?

2. Why does HMC Management emphasize

using real returns in their portfolio analysis
ESTIMATES OF RETURNS
HMC Management uses expected returns, standard
deviation and covariances as input in their portfolio
analysis.

ANY OBSERVATIONS
ASSUME

▷Take HMC’s management’s views about expected

returns, SD and covariances of real returns on asset
classes as given.

▷Cash is riskless
SINGLE ASSET CLASS

▷If Board allowed HMC to invest in cash and one

other asset, which asset class would you advise them
to invest in and why?
TWO ASSET CLASSES

▷If Board allowed HMC to invest only in “run of the

mill” domestic equities and bonds, which
combination of those assets would you advise them
to invest? Why?
ADD COMMODITIES

▷If Board allowed HMC to add commodities to the

mix, would you advise them to add this asset class
and why?

▷How would you advise HMC to combine cash with a

portfolio of domestic equities, bonds and possibly
commodities
TIPS

▷What other asset classes do for the portfolio? In

particular would you advise HMC to invest in TIPS
Thanks for Your
time and Attention!