Harvard University’s nearly four-centuries-old endowment returned 2.9% in fiscal 2023, which ran through June 30, according to the university’sannual financial report. The value of the endowment stood at $50.7 billion, the largest of any U.S. university.

But muted returns in alternative investments, which make up a majority of the endowment portfolios of Harvard and many peers, resulted in the endowment underperforming its benchmark, while still outperforming some of its peers.

Harvard Management Co., which manages the endowment, allocates 39% of its endowment portfolio to private equity and another 31% to hedge funds. Public equity accounted for 11% of the asset allocation. Real estate had an allocation of 5%, bonds made up 6% of the portfolio and cash was 5%. Natural resources and other real assets had allocations of 1% and 2%, respectively.

Narv Narvekar, the CEO of HMC, wrote in his letter within the annual report that the endowment is in the process of adding more risk to the overall portfolio.

“Looking back over many years, a main constraint on Harvard’s endowment returns has been that the portfolio was structured to take less risk than what was likely prudent,” Narvekar wrote. “HMC built an analytical risk framework and partnered closely with the University to help determine the University’s risk tolerance. After several years of rigorous conversation and analysis, the University agreed to a measured increase in the portfolio’s risk level, which HMC began implementing over the last two years. … We note that we continue to operate, even after the risk increase, at a somewhat lower risk level than many peer endowments.”

Narvekar also addressed the issues of sustainable investing and gender and racial diversity in the financial industry in his letter. 

“HMC has started investing in innovation related to mitigating greenhouse gas emissions,” he wrote. “While we have been early in investing in this area over the last few years, we believe that a decade from now it will be accretive to endowment performance. … In addition … there were two other specific initiatives that we are proud to have incorporated into our operations: addressing gender and racial diversity in the financial industry and expanding our sustainable investing practices to meet the University’s pledge to have the endowment net zero of greenhouse gas emissions by 2050.”

HMC did not provide a breakdown of returns for each asset class. The university’s annual report noted that private equity returns were “slightly positive,” while venture capital and growth investments were “mildly negative.”

Harvard’s 11% exposure to public equities was not enough to enable the overall portfolio to benefit from the equity-market rally in the second half of the fiscal year. The annual report cited the limited long-only public equity exposure as mitigating the impact of equity-market performance on the portfolio as a whole.

Fiscal 2023 returns trailed the university’s long-term return of 8%.

In fiscal 2022, Harvard’s endowment returned negative 1.8%, well below the double-digit declines in public equities. Narvekar’s letter attributed the FY 2022 performance to private managers not reducing the value of investments consistent with the decline in equity markets. Likewise, the university says private asset managers did not increase the value of their investments against the backdrop of rising equity markets.

“While we are deeply appreciative of the capable navigation of complicated markets by CEO Narv Narvekar and his colleagues at Harvard Management Company, the 2.9% return on the endowment this year is below our long-term target return of 8%,” wrote Ritu Kalra, Harvard’s chief financial officer, and Timothy Barakett, the university’s treasurer, in their financial overview. “Narv expressed caution about forward-looking returns in private portfolios last year, noting that ‘private managers have not yet marked their portfolios to reflect general market conditions.”

The endowment optimized its asset allocation during the fiscal year by pivoting “in a risk-neutral manner” to private equity from private real estate, agriculture and timber, Narvekar wrote. It also built up a large portfolio of equities separate from its allocation to hedge funds. The endowment also diversified into biotech within public and private markets and significantly increased its allocation to venture capital investments in technology companies.

Harvard’s returns are in line with a study from Markov Process International’s Transparency Lab, which predicted that university endowments would underperform due to poor venture capital returns. MPI estimated Harvard’s endowment would return 2.75%.

For fiscal 2023, the endowment received gifts of $486 million from alumni and foundations.

Related Articles:

4 Ivy League Institutions Release Fiscal 2023 Endowment Results

MPI: Venture Capital, Technology Investments Will Define 2023 University Endowment Returns

Academic Endowments Post Sluggish Returns for Fiscal 2023

Tags: Harvard Endowment, Harvard Management Company, Harvard University, Markov Processes International, MPI Transparency Lab, Ritu Karla