Harvard Endowment Rises 21% on Hedge-Fund Gains

Harvard University, the world’s richest school, said its investments rose 21 percent in the past year, outperforming benchmarks and extending the rebound from record losses in 2008.

The value of the university’s endowment climbed $4.4 billion to $32 billion as of June 30, according to a report yesterday by Harvard Management Co., which oversees the fund. The increase in value also reflects gifts from donors and distributions to help finance operations at the Cambridge, Massachusetts, university.

Jane Mendillo, who took over as chief executive officer of Harvard Management in July 2008, plans to shift more money in- house as she continues to cut the endowment’s use of outside asset managers. She has overseen the fund’s rebound from a 27 percent loss in the wake of Lehman Brothers Holdings Inc. (LEHMQ)’s collapse in September 2008.

“Some have taken advantage of the lessons of 2008, others have not,” said Steven Drobny, author of “The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes and Real Money.” With markets so volatile, “you’ll start to see a wider dispersion in endowment return numbers going forward.”

Harvard’s investments rose in all categories during the fiscal year. Returns on hedge funds, real assets such as commodities, and fixed-income assets beat internal benchmarks, while gains by private equity, real estate and public stocks fell short of targets, the report shows.

“We’re on a really good trajectory with this portfolio,” Mendillo, who turned 53 on the third anniversary of Lehman’s Sept. 14 bankruptcy filing, said yesterday in an interview. “We’ve done a lot of restructuring. We’re past the midpoint in the turnaround in this portfolio.”

‘Policy Portfolio’

Harvard Management, which is based in Boston, measures its performance against a theoretical “policy portfolio” that it says reflects the most appropriate mix of assets for the university. The endowment beat the 20 percent gain by the benchmark in the past year, as well as the 19.5 percent increase of a hypothetical portfolio of 60 percent stocks and 40 percent bonds. Harvard’s fund returned 5.5 percent, 9.4 percent and 13 percent in the past 5, 10 and 20 years, topping the policy portfolio, the report said.

The endowment also outperformed the average of 20 percent return in the past year of endowments and foundations tracked by consultant Wilshire Associates in Santa Monica, California.

Harvard Management lowered the amount of cash in the policy portfolio to zero from the 2 percent it established in the two years after the Lehman bankruptcy, the five-page report shows.

“Our portfolio was much more locked up and illiquid,” Mendillo said. Harvard has $5 billion to $6 billion in commitments to private-equity and real estate funds, down from $11 billion about two years ago, according to Mendillo.

Meyer, El-Erian

About 30 percent of the endowment was overseen in-house when Mendillo became CEO and “it makes good sense for Harvard to allocate a larger proportion of the total portfolio to internal management in the coming years,” Mendillo wrote in the report. Now, about 35 percent of the endowment is overseen internally, with the rest allocated to outside managers, she said.

Harvard managed as much as 85 percent of its money internally under Jack Meyer, who ran the fund for 15 years before leaving in 2005 following alumni complaints about pay.

After a nine-month search, Harvard named Mohamed El-Erian, who oversaw emerging-markets investments at Pacific Investment Management Co., to succeed Meyer. El-Erian resigned after less than two years to return to Newport Beach, California-based Pimco, where he became co-chief executive officer and co-chief investment officer. Under El-Erian, the percentage of money Harvard managers handled fell to about 30 percent.

Manager Pay

Harvard fired workers, sold $2.5 billion in bonds and delayed construction projects after the Lehman bankruptcy crippled financial markets. The 375-year-old school suffered its first endowment loss in seven years and the biggest in four decades. The fund, which finances about one-third of the university’s budget, is $4.9 billion away from its peak of $36.9 billion as of June 30, 2008.

In 2009, as the fund began to rebound, Mendillo was paid $3.5 million, making her the fourth highest-paid money manager at the endowment. The fund’s top internal managers on her staff earned about $25.3 million combined that year. Last year’s compensation numbers haven’t yet been released.

Changing Managers

Harvard is the second Ivy League school to report its endowment earnings. The University of Pennsylvania in Philadelphia said Sept. 15 its fund gained 19 percent in the year ended June 30, helped by rising stock markets. Colleges with the biggest endowments are set to announce their results in the next month or two. There are eight northeastern U.S. schools in the Ivy League.

In the past year, Harvard’s stocks overall gained 28 percent, boosted by a 35 percent gain in U.S. equities, while foreign and emerging markets underperformed, the report said. Private-equity investments increased 26 percent, public commodities jumped 27 percent and foreign bonds rose 22 percent.

Real estate investments rose 11 percent. Fixed income beat targets across U.S. Treasuries, inflation-linked bonds and sovereign debt, increasing 9.1 percent. Hedge funds gained 12 percent, after the endowment restructured its managers “significantly over the past few years,” Mendillo wrote.

‘Now Happier’

The fund is “now happier with the mix of managers and strategies it contains: a variety of approaches to generating value ranging from purely opportunistic to long-short to unusual investments such as royalty streams,” Mendillo said. The stakes will likely help to stabilize returns when “public equity markets do not do as well as they did this past fiscal year,” she wrote.

The endowment has also been reshaping its real estate portfolio and has sold some “fully leased core properties” while setting up “a number of promising joint venture partnerships and is making investments in inefficient pockets of the global real estate market,” Mendillo wrote.

“Since the end of the fiscal year, the markets have been exceptionally volatile, driven by concern and uncertainty related to the debt ceiling debate, the fate of the euro zone, the S&P downgrade of the U.S. Treasury securities and indications of slowing growth in economies at home and abroad,” Mendillo wrote. “The impact of these issues on our portfolio is unavoidable.”

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net.

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.