Harvard Endowment's Performance Lags Peers With 5.8% Return

  • University's endowment value rose 3.3% to $37.6 billion
  • Fund trails peers as it tries to improve performance

Harvard University said it’s seeking to revitalize the performance of its endowment -- the world’s largest -- after posting a 5.8 percent investment return for the year ended June 30, again lagging its peers.

Stephen Blyth, who was promoted to chief executive officer of Harvard Management Co. in January, said in a letter he is working to overhaul the endowment’s asset allocation framework, reinvigorate investment-decision making, and review compensation. While the value of the fund rose 3.3 percent to an all-time high of $37.6 billion, the former bond trader expressed concern about performance.

“One can see a steady decline in outperformance over the past ten years,” Blyth said in the letter released Tuesday. “Over a five-year period, we do believe that HMC should in the aggregate deliver consistent outperformance.”

That hasn’t been the case as Harvard has more often been the worst-performing Ivy League school as universities have recovered from steep investment losses in 2008 to 2009. While many peers have yet to release returns this year, some have set a high bar including the Massachusetts Institute of Technology, which had a gain of 13.2 percent.

The median return for endowments and foundations with more than $500 million this year is 3.6 percent, according to an estimate by Wilshire Trust Universe Comparison Service.

Harvard’s endowment beat its benchmark by 190 basis points, according to its statement. Over 10 years, the endowment returned 7.6 percent.

Alternative Assets

Private equity and hedge funds helped to distinguish some smaller schools this year, with Bowdoin College posting a 14.4 percent return. Blyth said Harvard’s absolute return portfolio had a tough year, with a return of 0.1 percent compared with a benchmark of 3.5 percent. He cited losses from investments in the shipping industry as a factor.

The portfolio was also dragged down by negative returns in foreign equity and emerging market equity, each losing about 2 percent.

Harvard’s private equity investments gained 11.8 percent, beating a benchmark of 10.8 percent. Venture capital delivered a 29.6 percent return, driven by technology and biotech sectors, Blyth said. The top-performing asset class was real estate, which returned 19.4 percent, 790 basis points over the benchmark.

Alternative assets have been a source of contention for the endowment since the credit crisis, when the university had an overall investment loss of 27 percent through June 30, 2009. It sold private equity commitments to raise cash and was more cautious than other universities in investing in new opportunities, said Verne Sedlacek, former president of Commonfund, a money manager based in Wilton, Connecticut.

“They’re still fighting the 2008 crisis and they’ve had significant turnover in leadership,’ Sedlacek, who is also the former chief financial officer of Harvard’s endowment, said in an interview before this year’s results were released.

Flexible Approach

Jane Mendillo, the former CEO who took over in the middle of the downturn, said in past annual reports that an overhang of poorly-performing illiquid assets in the portfolio was to blame for crimping performance. As Blyth’s letter points out, the value of the endowment is still below its 2008 peak, adjusting for inflation.

Blyth is seeking to pivot from his predecessor, unveiling a nuanced and often academic explanation of how the fund can again outshine peers. He promised a more flexible approach to allocating money among asset classes with greater scale when necessary. He said there could be better collaboration, such as between real estate and venture capital teams. He also wants closer links between compensation and overall fund performance.

The new CEO was formerly head of public markets at HMC and joined in 2006 from Deutsche Bank. The university has also made changes on the board overseeing the fund, with a new chairman and new members. Andrew Wiltshire, the head of alternative investments, announced earlier this month he was retiring. The university hasn’t named a replacement.

“After several years of necessarily dealing with the depths of the financial crisis and its aftermath, and the accompanying severe liquidity issues across the university as a whole, we are now in a position to harness that power to deliver on our objectives,” Blyth wrote.

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