Endowment Returns 5.8 Percent, Growing to $37.6 Billion

Harvard Management Company is again outpaced by some peer institutions

UPDATED: September 23, 2015, at 4:35 a.m.

Harvard's endowment rose to $37.6 billion on returns of 5.8 percent in the 2015 fiscal year, beating most of its internal benchmarks and the general market indices but lagging behind notable peer institutions such as MIT and Stanford.

The annual returns, reported by Harvard Management Company president and chief executive officer Stephen Blyth in a letter to alumni that was released Tuesday, were the first issued under Blyth’s leadership, less than a year after he took over in January to high expectations.

While some peer institutions have yet to release their returns, Harvard’s investment gains were again outpaced by Stanford and MIT, whose endowments saw returns of 7 and 13.2 percent, respectively. Harvard beat the University of Texas system’s returns of 3.4 percent and the Standard and Poor’s 500 index of 4.5 percent over the same period.

In his letter on Tuesday, Blyth outlined an overhauled investment approach and plans to rework HMC’s compensation to tie bonuses more to the fund's overall progress. As he took office mid-fiscal year, and because large institutional investors deal with significant illiquidity, Blyth is likely still implementing major aspects of his approach.

Even so, however, the endowment’s meager performance comes as Harvard is mounting a major fundraising campaign, which has increased scrutiny on the fund’s returns.

HMC’s returns in real estate this year exceeded expectations, with a return of 19.4 percent, beating internal benchmarks by 7.9 percent, the highest of all asset classes. Real estate investments compose 12 percent of Harvard’s portfolio. The critical aspect of real estate’s success in FY 2015 lies in Harvard’s direct real estate investment program managed internally by HMC, which returned 35.5 percent.

But HMC performed extremely poorly in the “absolute return” asset class, which consists of outside investments to hedge funds. The class returned 0.1 percent, missing the internal benchmark of 3.5 percent, the only asset class that fell short of internal benchmarks. Blyth wrote that the main reasons for the failure in absolute return were failures of outside managers and major losses in shipping investments.

Stephen Blyth
Harvard Management Company chief executive officer Stephen Blyth, pictured in 2013.

Within private equity, led by Richard L. Hall ’90, HMC returned 11.8 percent, beating HMC-set benchmarks by 1.1 percent. The private equity division’s venture capital investments returned 29.6 percent, driven by technology and biotech investments.

While Blyth highlighted the success of U.S. public equities, which returned 12.4 percent and beat its benchmark by 5.2 percent, HMC took a haircut on equities in foreign and emerging market equities, which experienced negative returns of -1.8 percent and -2.2 percent, respectively. Blyth rationalized the hits in those two classes, writing that “strength of the U.S. dollar versus other currencies led to lower nominal returns in developed and emerging markets.”

The Management Company returned 15.4 percent in FY 2014, but these returns still were behind the average 16.5 percent returns of peer academic institutions with endowments of more than $1 billion. According to Blyth’s letter, HMC placed fourth in five-year annualized endowment returns of America’s top 10 largest endowments from FY 2011 through FY 2014.

This poor performance relative to peer institutions had been a common theme for HMC under the tenure of Jane L. Mendillo, who stepped down from her position as CEO in late 2014. Just after Mendillo took over the helm of HMC in 2008, the global financial crisis hit Harvard particularly hard. The endowment lost $11 billion and Mendillo spent much of her tenure creating liquidity to meet budgetary shortfalls, especially within the Faculty of Arts and Sciences.

—Staff writer Tyler S. B. Olkowski can be reached at tyler.olkowski@thecrimson.com. Follow him on Twitter @OlkowskiTyler.

—Staff writer William C. Skinner can be reached at wskinner@college.harvard.edu. Follow him on Twitter @WSkinner.

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