Investment Strategy

Harvard endowment warns of market ‘froth’

Stephen Foley
Harvard is hiring

Harvard is looking for investment managers with expertise as short-sellers, as the world's biggest university endowment becomes more cautious about the outlook for financial markets.

In its latest annual report, which showed investment returns fell to 5.8 per cent in the year to June, the $38 billion endowment said its managers had started to increase cash holdings and feared that some markets had become "frothy"."We are proceeding with caution in several areas of the portfolio," Harvard Management Company chief executive Stephen Blyth wrote in the report.

"We are being particularly discriminating about underwriting and return assumptions given current valuations.

"In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market."

Mr Blyth, a British-born statistician, was promoted to run the endowment last year after the resignation of Jane Mendillo, whose returns failed to keep pace with those at other Ivy League institutions.

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Mr Blyth unveiled an overhaul of Harvard's asset allocation process which is likely to be examined widely among other institutions.

Endowments such as those at Harvard, and particularly Yale under its chief investment officer David Swensen, have been seen as pioneers in asset allocation and portfolio management theory.

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Harvard is ditching its traditional approach of assessing the likely risk and return of each separate asset class and instead focusing on five key factors: the outlook for global equities, US Treasuries, currencies, inflation and high-yield credit.

The result is that Mr Blyth will be sharply scaling back the university's holdings of overseas equities, dialling up real estate and bond investments, and giving himself more flexibility.

He set out a new promise to beat inflation by 5 per cent a year over 10 years.

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The 5.8 per cent gain for the Harvard endowment in the year to June 30 compared with 15.4 per cent the previous year, when global equity markets were rising more sharply.

Its $6 billion allocation to hedge funds also held back performance, returning only 0.1 per cent.

While disappointing hedge fund performance has led some big institutions, including the California public pension fund Calpers, to pull out of the sector all together, Harvard is understood to be happy with its hedge fund portfolio, which outperformed its benchmark in the five previous years.

The endowment's real estate portfolio was its top performing asset, up 19.4 per cent last year.