Harvard Endowment Fell 22 Percent in Four Months

Decline dwarfs University's previous worst single-year loss

Harvard’s endowment—the largest in higher education—fell 22 percent in four months from its June 30 value of $36.9 billion, marking the endowment’s largest decline in modern history, University officials announced yesterday.

The precipitous drop will require Harvard’s faculties to take a “hard look at hiring, staffing levels, and compensation,” wrote University President Drew G. Faust and Executive Vice President Edward C. Forst ’82 in a letter informing the deans of Harvard’s losses.

The decline, which amounts to more than $8 billion, is larger than the endowments of all but four other universities—Yale, Princeton, Stanford, and MIT.

In the same period, the S&P 500 fell 24.6 percent. The index has fallen an additional 12.4 percent since then.

The estimate of 22 percent may not fully capture the actual losses from this period, Forst said in an interview yesterday, as some of Harvard’s money is invested with external managers that have yet to report their latest figures. Faust and Forst wrote in yesterday’s letter that the University should plan for a 30 percent drop-off in endowment value for the year ending June 30, 2009.

The news comes during the worst economic turmoil in decades. University endowments across the country have begun announcing unprecedented losses and instituting hiring or construction freezes in an effort to save funds.

The Faculty of Arts and Sciences placed a freeze on staff hiring last week, following a cautionary letter from Faust a month earlier that warned of cutbacks ahead.

Yesterday’s figure dwarfs Harvard’s worst single-year endowment loss of 12.2 percent in 1974. The endowment has clocked only three years of negative returns, all under three percent, in the subsequent three decades.

Forst said University leaders have delayed setting the endowment payout rate for the next fiscal year—a figure generally announced the December before—until Harvard’s schools can reevaluate their budgets.

“Given the extreme volatility in the markets, I don’t expect [the payout rate] will be set until we have a much more concrete sense about financial plans and endowment performance,” Forst said.

Yesterday’s letter did state that University leaders expect to spend a higher percentage of the endowment next year in an effort to buffer the immediate impact of the losses.

The letter also stressed the possibility of slowing construction projects or reevaluating “staffing levels,” and Forst confirmed that the University will reevaluate the scope and pace of every major capital program—including Allston expansion plans and House renovations at the College.

“We expect that every part of the University is going to have to find ways to reduce its operating expenses,” Forst said.

The need for budget reductions could have particular impact on employee salaries and benefits, which make up half of the University’s costs, according to yesterday’s letter.

Forst would not say whether more hiring freezes would follow last week’s freeze in the Faculty of Arts and Sciences, but said individual schools will need to “take a hard look at compensation generally.”

The central administration will work closely with leaders at the schools to tailor solutions to their individual circumstances, Forst said, adding that Faust convened a two-hour meeting yesterday morning to discuss the latest financial update with the deans.

“Obviously, no one is happy with the endowment being down,” FAS Dean Michael D. Smith wrote in an e-mail to The Crimson yesterday, “but it does help out planning efforts to understand where the portion of the endowment that we can measure stands.”

While the schools struggle to budget for this new development, Harvard’s money managers plan to increase the University’s financial flexibility by upping cash holdings and reducing the amount of risk in the endowment portfolio.

Leveraging its strong credit ratings—the highest granted by rating agencies Moody’s and Standard & Poor’s—Harvard will issue new taxable fixed-rate debt. Unlike tax-free debt, these bonds can be used for any University expenditure and thus increase Harvard’s cash flexibility, Forst said.

The University will also convert existing short-term tax-exempt debt into bonds with longer maturities, allowing the University to postpone short-term payments to debt holders and retain a larger financial cushion to the volatility in the credit markets.

Multiple media outlets recently reported that Harvard was also seeking to shore up endowment holdings by selling $1.5 billion of its private equity portfolio at a drastically reduced price, but Forst declined to address those reports yesterday.

—Staff writer Clifford M. Marks can be reached at cmarks@fas.harvard.edu.

—Staff writer June Q. Wu can be reached at junewu@fas.harvard.edu.