Harvard Endowment Rises 11%, Trailing Wilshire Benchmark
Harvard Endowment's 11% Gain Trails Rivals
Michael Fein/Bloomberg
A Harvard Square subway sign sits in front of a building on the Harvard University campus in Cambridge, Massachusetts.
A Harvard Square subway sign sits in front of a building on the Harvard University campus in Cambridge, Massachusetts. Photographer: Michael Fein/Bloomberg
Harvard University, the world’s richest school, said its investments rose 11 percent in the past year, beating its own benchmark while trailing the returns of a broad group of institutions.
The university’s endowment climbed $1.4 billion to $27.4 billion as of June 30, according to a report today by Harvard Management Co., which oversees the fund. Besides investment gains, the increase reflects the net of gifts from donors and distributions to the Cambridge, Massachusetts, university.
Jane Mendillo took over as chief executive officer of Harvard Management in July 2008, weeks before markets plunged and the endowment lost a record 27 percent, leaving the school short of cash. She has made the fund more liquid, thinned the ranks of external money managers by 20 percent and reduced commitments to private-equity and real estate funds by more than 40 percent to $6.5 billion.
“We learned some specific lessons over the last two years about keeping control of our capital and being prepared for unexpected market conditions,” Mendillo, 51, wrote in the six- page annual report. “We have made and continue to make adjustments.”
Harvard University fired workers, sold $2.5 billion in bonds and delayed construction projects after the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 crippled financial markets. The 374-year-old school suffered its first endowment loss in seven years and the biggest in four decades. The fund, which finances 35 percent of the university’s budget, is $9.5 billion away from its peak of $36.9 billion as of June 30, 2008.
Trailing Wilshire Benchmark
Institutional funds, including public and corporate pensions, endowments and foundations, returned a median of 13 percent in the past year, according to Wilshire Associates, a consulting firm in Santa Monica, California. The firm’s Trust Universe Comparison Service tracks 1,300 funds and $3 trillion in assets.
Harvard is the first of the Ivy League schools, a group of eight U.S. colleges in the Northeast, to release endowment results this year. The California Public Employees’ Retirement System, the largest U.S. public pension fund, said July 15 it gained 11.4 percent to $200 billion as of June 30. The California State Teachers’ Retirement System, the second-biggest U.S. public pension fund, earned 12.3 percent, ending the fiscal year with $129.8 billion.
Benchmark Comparisons
Harvard Management, which is based in Boston, measures its performance against a theoretical “policy portfolio” benchmark that it says reflects the most appropriate mix of assets for the university. The endowment beat the 9.4 percent gain by the gauge in the past year. It returned 4.7 percent, 7 percent and 12 percent in the past 5, 10 and 20 years, outperforming the Wilshire and policy portfolio benchmarks, the report said.
Harvard topped its internal benchmarks in most asset classes in the year ended in June. Both private and public equities rose 16 percent. Absolute-return investments, which include hedge funds, climbed 15 percent, while fixed income gained 8.5 percent. Real assets, which comprise property, commodities and natural resources such as timberland, dropped 2.7 percent, less than the internal benchmark’s 4.7 percent loss. Sub-categories including emerging-market equities and high-yield bonds rose less than benchmarks.
Harvard Management targets 23 percent of the endowment to real assets, more than five times the allocation in the Wilshire universe, driving the fund’s underperformance in the past year.
Seeking an Edge
The endowment is devoting more money to investments where it has “good long-term experience and where we have competitive strength,” Mendillo said in the report, citing natural resources and fixed-income trading.
“We are increasingly confident that we can develop an edge in real estate and commodities, taking a few pages from the books we’ve developed around timberland investing and internal trading,” she wrote.
Harvard named Daniel Cummings as managing director of its real estate group in April 2009. Under Cummings, the fund has made several investments outside of the traditional limited- partnership fund structure, Mendillo wrote.
Mendillo has sold some of Harvard’s private-equity holdings in the wake of the financial crisis, and as the industry has become increasingly crowded over the past decade, the endowment is projecting “more muted” returns, she wrote.
“We anticipate that the number of active relationships within our private-equity and venture capital portfolio will be reduced, while the concentration will be increased in our highest-conviction managers,” Mendillo said.
Predecessors
Mendillo was a fund manager at Harvard for 15 years before leaving in 2002 to build Wellesley College’s investment office. She returned as head of Harvard Management after Mohamed El- Erian resigned to become CEO of Pacific Investment Management Co., a bond firm based in Newport Beach, California. El-Erian had succeeded Jack Meyer, the endowment chief of 15 years, who left amid criticism from Harvard alumni about compensation for internal fund managers.
An alumni group from the class of 1969 first criticized pay packages in 2003, calling salaries excessive in a letter to Lawrence Summers, then the school’s president. The previous year, the top six in-house managers earned a combined $107.5 million. The group said more money should be used for scholarships, even if that meant lower returns from the endowment.
About 30 percent of the endowment was overseen in-house when Mendillo became CEO. Today’s report didn’t give a current figure.
Cost Study
Harvard Management hired a consulting firm this year to study its cost structure, according to the report. The consultants found that the university saved more than $1 billion in management fees in the past decade by relying on in-house traders.
“While I am often asked about my target for internal versus external management, any shift in assets under management will be incremental and driven by the addition of new talent and strategies, not by any arbitrary target for allocating Harvard’s endowment funds,” Mendillo wrote. “My team and I do think that it makes sense to increase the share of internally managed assets under the right conditions, given the added agility and cost effectiveness.”
To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net.
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