Harvard Endowment Reports 11% Return for Year

A year after a disastrous 27 percent decline that prompted layoffs, salary freezes and a halt to some campus expansion, the Harvard endowment on Thursday reported a solid 11 percent increase in its $27.4 billion portfolio for the fiscal year ended June 30.

In her first year as president and chief executive of the Harvard Management Company, which oversees the endowment, Jane Mendillo struggled as the portfolio she had inherited faced heavy cash demands in the area of alternative investments when the stock and commodities markets fell.

Since then, Ms. Mendillo has put her stamp on the endowment, increasing its readily available cash and generating a respectable if not spectacular return, several endowment specialists said of the latest performance. The return does lag that of stock market averages for the period by a few percentage points, though it is better than the internal benchmark the endowment uses.

Source: harvard.edu

Ms. Mendillo said that the endowment was more liquid and “well aligned with the long-term need of the university and with regard to the world more broadly.” She said she was happy with how the portfolio did last year, but struck a note of restraint, adding “there are areas where we need to be more muted in our expectations.”

Harvard is the first of the major university endowments to report returns and, as such, its performance is closely watched by institutional investors. For years, Harvard’s endowment, the nation’s largest university endowment, seemed to defy gravity as it posted sterling gains, bested only by Yale’s endowment.

Those returns fueled grand plans at Harvard and led it to cover about 35 percent of its budget with endowment money.

One question is whether Harvard can continue to count on the endowment for such a large part of its spending or whether it must raise tuition or cut costs further.

Katie Lapp, Harvard’s executive vice president, said on Thursday that the university was managing resources prudently, but she did not signal more cuts.

In the next several weeks, other big schools will release investment scorecards. Dan Jick, chief executive of HighVista Strategies, which manages money for endowments, foundations and families, said: “I expect the numbers to be in the pack between 9 percent and 14 percent. If you had a lower-risk profile and lower exposure to public equities, then that number is consistent with that type of diversified allocation.”

The Standard & Poor’s 500-stock index rose 14.4 percent in the period. Harvard’s internal benchmark is a portfolio that gained 9.4 percent. Harvard also cited a portfolio of 60 percent stocks and 40 percent bonds, which rose 12.6 percent. A third comparison is the 13.3 percent median return of institutional plans, including corporate and public pension plans, foundations and endowments with assets over $5 billion, compiled by Wilshire Associates.

Ms. Mendillo attributed Harvard’s weaker performance to the fact that it had about 20 percent less of its assets in equities.

Ms. Mendillo, who previously ran the Wellesley College endowment, took over at Harvard in July 2008. The endowment had surged for many years under Jack Meyer, who left in 2005 in part because of criticism of his high pay. He was replaced by Mohamed El-Erian, who stayed two years, then returned to a top post at the Pacific Investment Management Company. Before and after his tenure, board members ran the endowment.

When the market tumbled in the financial panic, Harvard needed cash and had to sell some investments in very successful hedge funds, among other areas.

After that, Harvard reviewed its investment approach.

Ms. Mendillo said that the endowment had not changed its overall approach, which is a diversified portfolio that includes alternative investments in private equity, hedge funds and real estate, but it now has about 10 percent more of its portfolio in more liquid instruments.

One endowment chief noted that by shifting to funds that can be sold more easily, a more conservative strategy, Harvard may be forgoing some gains.

Recently, Harvard held talks to sell some holdings in United States real estate funds to the China Investment Corporation, a sovereign wealth fund, for about $200 million. Although Ms. Mendillo would not confirm those negotiations had ended, she said that Harvard planned to maintain its weighting in real estate, now 9 percent of the portfolio.

Compensation for money managers at the endowment, where one-third of the funds are managed in-house, has often prompted controversy because some alumni consider it excessive for an academic institution.

For many years, the pay was disclosed in December. But in May, Harvard announced that Ms. Mendillo had earned about $1 million from July 1, 2008, to the end of that year. She said the endowment had always reported pay for managers’ calendar year to the Internal Revenue Service in May and that the new approach provided consistency.

By delaying the release until May and tying it to a calendar year, not a fiscal year, one endowment specialist noted, pay and performance will cover different periods, which may make it harder to connect performance and compensation and thus defuse criticism of pay packages.

In her report, Ms. Mendillo wrote that Harvard had hired a consulting firm to look at pay, and that the firm found Harvard’s operating costs were lower than they would have been had it hired outsiders to manage its investments.