Harvard Endowment Sees 11% Return

(September 10, 2010) — Harvard University, the world’s wealthiest school with a $27.4 billion endowment portfolio, revealed that its investments rose 11% for its fiscal year ended June 30, outpacing its own benchmark.

The good news for the Cambridge, Massachusetts-based university comes a year after its painful 27.3% decline led to layoffs, salary freezes and a delay in construction projects. The fund, which finances 35% of the 374-year-old university’s budget, is $9.5 billion short of its peak of $36.9 billion as of June 30, 2008.

According to the report released by Harvard Management Co. (HMC), which oversees the fund, the university’s endowment increased $1.4 billion to $27.4 billion as of June 30. The 11% return exceeded the returns of the endowment’s policy portfolio benchmark by 160 basis points, the report said, with the increase fueled by the net of gifts from donors and distributions.

Has the endowment model run its course? “Our answer to that question is ‘no,'” wrote Jane Mendillo, who took over as chief executive officer of Harvard Management in July 2008. “We continue to believe that the creation of a diversified portfolio including significant exposure to a variety of alternative assets has been a major factor in HMC’s long-term success.” Nevertheless, the university’s endowment report noted that the HMC learned some specific lessons over the last two years about keeping control of capital and being prepared for unexpected market conditions. “We have made and continue to make adjustments, and recognize that we will constantly need to evolve to be able to seize on market opportunities, manage our risks and meet the needs of this amazing University,” stated Medillo in the six- page annual report.

A study released in late May opposes Harvard’s views on the endowment model. The earlier analysis claimed that Harvard and five other New England institutions of higher education took on too much risk during the economic crisis, fueling the crisis in the region and affirming the endowment model of investment is “broken.” The 81-page report indicated that Harvard’s losses reflect how terribly wrong the endowment model can go when pushed to certain extremes in a climate of leadership crisis. The endowment model is an investments style pioneered by Yale chief investment officer David Swenson that relies heavily on diversification into the so-called illiquidity premium provided by alternative asset classes.

“While much attention is rightly being paid to the role of for-profit financial institutions in provoking the recent financial crisis in the weakly regulated shadow banking system, the role of nonprofit institutional investors in heightening risk in the capital markets requires much closer scrutiny as well,” said Dr. Joshua Humphreys, the lead author of the report and senior associate and director of the Center for Social Philanthropy at Tellus Institute in Boston. “The data we analyze in the report make clear that the Endowment Model of Investing is broken and needs to be greatly overhauled. Endowments need to become much more resilient to market volatility, and colleges should reclaim their historical role as nonprofit stewards of sustainability, both in their investments and in their local economies.”