Minus $11 Billion

HMC should reflect on how we manage our money

Last week, excitement over a spate of good weather was tempered by the announcement that, in the last fiscal year, Harvard’s endowment plunged 27.3 percent. Its total value fell approximately $11 billion to $26 billion, a loss greater than the total endowments of all but three other universities in the country. This sobering news highlights the fact that some mistakes were made in Harvard’s investment strategies, prompting a need to reconsider the way we manage our money.

Given Harvard’s financial needs and unique situation as a university, we do not need excessively volatile or risky investment approaches. As long as superlative students keep banging down the doors of admissions, the university’s flow of donations will not dry up. Therefore, we do not have the same need for blockbuster quarterly earnings, as a corporation does, and there is little reason we should financially aim as such. Harvard’s priority should be providing a reliable, quality educational and research experience during any given year. Consequently, Harvard Management Company, which oversees the investment of our endowment, should focus on steady, consistent growth, for safety rather than surprise.

That said, it would be naive to move into an overly conservative strategy in the wake of the losses of the past year. HMC managers were extraordinarily successful before 2008, and one bad year should not collapse our faith in their investment acumen. In the 10-year period ending in fiscal year 2008, the Harvard endowment outperformed the median institutional fund by 7.7 percent per year. Had it earned the median institutional fund rate, endowment assets would have been $23.5 billion less. Moreover, Harvard’s money czars are far from alone in their shortcomings this year. Yale’s endowment fell 30 percent in the past fiscal year.

Therefore, although there are lessons to be learned going forward, calls to drastically scale back risk-taking in the future are unfounded. This would prevent Harvard from recovering from its current dire straits and stunt our growth prospects. HMC should instead look to manage money mindfully, attaining good enough returns given the university’s particular situation. This is our best hope to seeing the endowment recover and making the budget cuts of the past year a distant memory.