Harvard Management Co. and Inflation Protected Bonds
The Harvard Management Company and Inflation Protected Bonds
The Harvard Management Company is an entity wholly owned by Harvard University and it is responsible for managing Harvard’s endowment and pension assets. At the end of the second quarter of 2000, Harvard Management Co. oversaw the management of $19 billion, the majority of it managed internally by Harvard’s investment professionals. The endowment’s goal is to provide a real return of 6%-7%, of which 4%-5% would be distributed annually to the university and the balance of returns would remain to allow for a real growth rate of spending. As of the second quarter of 2000, Harvard was actively considering creating an allocation to Treasury Inflation Protected Securities (TIPS) in its Policy Portfolio. Harvard believed the portfolio weights should be changed due to changes in capital market assumptions and the rise of TIPS as an institutional-level investment.
TIPS Versus Nominal Treasury Bonds
Like many institutional portfolios, Harvard’s portfolio contained an 11% target allocation to domestic bonds. Including US Treasury securities as substantial portion of this allocation would allow Harvard to earn a market return on a fixed income instrument without having to worry the credit risk. However, investing in Treasuries carries significant risks such as interest rate risk and inflation risk. Traditional Treasury securities consist of a par value of a bond and a state coupon rate, which is paid semiannually. The payments are fixed throughout the life of the bond, but the real value of the principal at maturity can be significantly different that the beginning of the investment due to inflation, or a loss in the purchasing power of money. Traditional Treasuries do not adjust their principal and interest payments due to changes in the inflation rate. TIPS are different in that their principal value adjusts to increases in the Consumer Price Index (CPI). The CPI is a measure that examines the
The Harvard Management Company is an entity wholly owned by Harvard University and it is responsible for managing Harvard’s endowment and pension assets. At the end of the second quarter of 2000, Harvard Management Co. oversaw the management of $19 billion, the majority of it managed internally by Harvard’s investment professionals. The endowment’s goal is to provide a real return of 6%-7%, of which 4%-5% would be distributed annually to the university and the balance of returns would remain to allow for a real growth rate of spending. As of the second quarter of 2000, Harvard was actively considering creating an allocation to Treasury Inflation Protected Securities (TIPS) in its Policy Portfolio. Harvard believed the portfolio weights should be changed due to changes in capital market assumptions and the rise of TIPS as an institutional-level investment.
TIPS Versus Nominal Treasury Bonds
Like many institutional portfolios, Harvard’s portfolio contained an 11% target allocation to domestic bonds. Including US Treasury securities as substantial portion of this allocation would allow Harvard to earn a market return on a fixed income instrument without having to worry the credit risk. However, investing in Treasuries carries significant risks such as interest rate risk and inflation risk. Traditional Treasury securities consist of a par value of a bond and a state coupon rate, which is paid semiannually. The payments are fixed throughout the life of the bond, but the real value of the principal at maturity can be significantly different that the beginning of the investment due to inflation, or a loss in the purchasing power of money. Traditional Treasuries do not adjust their principal and interest payments due to changes in the inflation rate. TIPS are different in that their principal value adjusts to increases in the Consumer Price Index (CPI). The CPI is a measure that examines the