Moody's: Harvard's Endowment Returns Signal Dark Clouds

Harvard's flat returns on its $30.7 billion endowment, the largest of any educational endowment worldwide, is a sign that other endowments are in trouble, rating agency Moody's has said.

(October 5, 2012) — Moody’s Investors Service believes that lackluster return on Harvard University’s $30.7 billion endowment is a sign that other endowments in the United States are in some trouble.

Last week, Harvard University’s endowment announced it had shrunk 0.05% in the 2012 fiscal year.

The ratings agency announced in a report: “A sharp decline from the private university’s 11% return in fiscal 2010 and 21.4% return in the fiscal 2011, the 2012 results reflect ongoing volatility in global equity markets. These results are credit negative for Harvard and other endowment-dependent universities, particularly those rated Aaa and Aa, which typically spend 4%-6% of their endowment annually to fund 20%-50% of their operating expenses.”

Moody noted that Harvard’s announced return for fiscal 2012 is lower than the returns of other endowments, including Yale University, which had a 4.7% return, and Massachusetts Institute of Technology, whose endowment returned 8%. “However, Harvard’s 20-year annualized endowment return is very strong at 12.3%,” the ratings agency added.

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The report by the agency continued: “In the wake of steep investment losses in fiscal 2009, many boards and management teams acted swiftly and proactively to absorb lower endowment draws into their future budgets and implemented significant expense savings and efficiencies. Actions included downsizing staff and programs, instituting hiring freezes, streamlining and centralizing shared services, scaling back capital projects, and, in a few cases, reversing prior decisions to expand financial aid.”

Consequently, based on highly variable investment returns over the past decade, Moody’s said it expects endowment-dependent institutions to make more conservative spending decisions for future fiscal years and to more fully assess their operational vulnerability to investment volatility.

“Budgetary models are increasingly stress-tested, and management teams are adjusting to more conservative assumptions about long-term rates of return on their endowment,” the report said. “Many have lowered their assumed annual endowment returns to 7%-8%, compared to the higher 9%-10% return assumptions that were common prior to 2009.”