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Endowment Sees 11% Returns After Large Losses

By Elias J. Groll and William N. White, Crimson Staff Writers

Harvard’s endowment grew to $27.4 billion in the fiscal year that ended June 30, 2010, an 11-percent investment return that comes a year after the endowment plummeted in value by 27.3 percent to $26 billion.

Though the fund—the largest in higher education—posted a marked gain, it underperformed a theoretical benchmark portfolio that includes 60 percent stocks and 40 percent bonds by about 2 percent, according to Harvard Management Company’s annual report, issued today.

While markets have broadly begun to recover in the wake of the financial crisis, the second half of fiscal year 2010 saw much market volatility, due in large part to turmoil in the sovereign debt market as a result of concerns about Greek debt. But according to HMC President and CEO Jane L. Mendillo, the University endowment is better equipped to handle market turbulence than in the past.

“It has been a productive year,” Mendillo wrote in a report announcing the investment results. “In comparison to one year ago, our portfolio and our organization are significantly better positioned to continue to deliver strong long-term returns as well as actively manage our risks.”

According to the report, University money managers have continued to retool the portfolio to increase its liquidity, a move that gives managers more flexibility after the recent financial crisis left the University with a need for cash but unable to sell off illiquid assets.

HMC had previously invested heavily in alternative assets, which resulted in sizeable gains in the run up to the financial crisis, but quickly dropped in value in the aftermath of the housing market’s crash.

“Senior management at HMC has been working closely with the University this year, and I believe all would agree that we have achieved deeper understanding of appropriate risk parameters and better alignment of the endowment’s risk/return profile with the University’s goals and needs,” Mendillo wrote.

Over the past two years, the University has decreased its uncalled capital commitments from $11 billion to $6.5 billion, a change that further increases fund liquidity by decreasing the amount of money pledged to external managers in the future.

The past year has also seen HMC strengthen its risk management division, an effort that included hiring Neil Mason as Chief Risk Officer.

While emphasizing that HMC has taken strides to align its priorities more closely with the University’s, Mendillo’s letter sounded a note of caution.

“We also need to be mindful that our portfolio, while large, still operates under liquidity constraints and spending demands that are greater than they were 5-10 years ago,” Mendillo wrote, adding that the endowment spending now accounts for 35 percent of Harvard’s budget.

Despite the scare two years ago, the endowment has continued to invest in unusual asset classes, including natural resources like timber and agricultural land, a sector which continued to outperform its benchmarks.

Notwithstanding August media reports that HMC was considering selling a large chunk of its real estate investments, managers are focusing on this sector as an area with room for growth. Harvard’s real estate portfolio underperformed its benchmark, today’s report said, but HMC has strengthened its team in the area to prepare for future opportunities.

“The repositioning of our real estate portfolio will take several years, but it began in earnest this year with several new investments outside of the traditional LP fund structure,” Mendillo wrote.

The global financial crisis and increasing government regulation of financial firms have also had peripheral benefits for HMC.

The endowment has hired a number of managers seeking refuge from Wall Street as banks trim staff.

“The environment for attracting investment talent and experience to HMC has been favorable over the last two years, and we have taken advantage of this opportunity,” Mendillo wrote.

—Staff writer Elias J. Groll can be reached at—Staff writer William N. White can be reached at

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