A Guide to Harvard's Endowment

​Harvard lost almost $2 billion dollars in endowment value this year. Here’s what that means, why it matters, and an analysis of why it may have happened.
By Andrew M. Duehren and Daphne C. Thompson

By Derek K. Choi and Jessica M. Zhu

Harvard lost almost $2 billion dollars in endowment value this year. Here’s what that means, why it matters, and an analysis of why it may have happened.

What is Harvard’s endowment?

Harvard’s endowment is the $35.8 billion sum of money the University invests in a variety of financial markets; it’s the largest university endowment in the world. With the proceeds of those investments, Harvard uses the endowment to fund a number of operating costs and programs and ensure that Harvard will have that source of funding for the foreseeable future. No, it’s not one giant bank account that can be spent however Harvard pleases: The endowment is actually around 13,000 individual funds, the overwhelming majority of which are restricted in some way, that are invested collectively in a variety of assets.

The University takes a percentage of the money from these thousands of invested funds—about 5 percent of it every year—and uses it to fund Harvard programs. It’s Harvard Management Company’s job to oversee these funds and grow the endowment—in effect, to put more money in Harvard’s pocket through returns on investment.

Any first semester Economics concentrator can tell you about the beauty of financial growth; as Harvard’s endowment grows bigger, that 5 percent that it gives to University operations every year becomes an increasingly large sum. As the endowment grows, so does Harvard’s capacity to fund research, financial aid, House renewal, and the like.

What does all that money fund?

About a third of Harvard’s annual operating budget comes from the endowment; this year, it contributed around $1.7 billion to Harvard, or over a third of the University’s entire operating budget. That spending supports all the vital functions of the University, from professorships to the library collection to financial aid. Harvard’s 12 schools are funded by the endowment to different extents: The Faculty of Arts and Sciences, for example, received about 50 percent of its funding from the endowment last year, while the School of Public Health—many of its expenses provided for by a $350 million gift from 2014—only took 15 percent of its budget from the endowment.

Why does the endowment’s performance matter?

While $35.8 billion may seem like a whole lot of money—and it is—endowment losses can still make an impact on the day-to-day operations of the University. For instance, after the world economy crumbled in 2008, Harvard’s endowment took an $11 billion plunge, losing over a quarter of its value. The University was forced to make sharp cuts to its budget, laying off hundreds of employees and cutting student services. For example, hot breakfast still hasn’t returned to the Houses.

Where does all of the endowment’s money come from?

In short: donations. Earlier this month, the University announced it had raised over $7 billion so far in its current capital campaign, passing its goal years ahead of schedule and breaking a higher education record.

When someone gives money to Harvard, they’ll often target it to a certain program or initiative, like a new professorship. Because both Harvard and the donor want these new programs or research efforts to exist for more than a single year, Harvard invests the donor’s money. The idea is that the University can grow the sum the donor gave Harvard and use that earned money to fund the program or effort forever—in perpetuity. (Not that every donation goes into the endowment, though: some donors choose to fund more specific short-term projects.)

Of course, the returns on these donations can soon begin to overshadow the donations themselves, so the endowment is a mix of recent gifts and decades-old money earned by investing donations. In her September 2014 financial report, Jane Mendillo, the then-CEO of HMC, wrote: “the value of $1,000 invested alongside the Harvard endowment in 1994 would have been more than $10,000 at the end of fiscal year 2014.”

Can the endowment be used for anything?

Because the endowment is heavily supported by donors, per Massachusetts law, Harvard has to follow the rules and conditions that those donors place on their gifts. And many of those gifts have strings attached; last year, 84 percent of the endowment—about $31 billion—had restrictions on how it could be used. That still leaves 16 percent of a multi-billion dollar endowment unrestricted, but oftentimes, donors specify the school they want their gifts to fund. Discretionary funds do exist, though, allowing University President Drew G. Faust to fund projects like [BLANK] Party and the Theater, Dance, and Media concentration.

Why isn’t the endowment doing better?

This point is debatable. In recent years, Harvard’s returns have trailed peer institutions, and HMC’s investment practices are falling under increasing scrutiny. HMC employs a unique “hybrid” investment model, which means that it employs both in-house and external money managers. Yale, by contrast, employs mostly outside managers, and some financial experts say it can be easier to shift investment strategies when not tied to an internal team. Plus, Harvard has to pay its finance executives competitively with leading hedge firms, and those salaries add up quickly.

Others have pinned poor returns on HMC’s recent revolving door. The University’s investment arm is looking for its fourth CEO in 10 years, and every new chief executive brings his or her own ideas to the job. That kind of strategic whiplash can be dangerous when endowment investments rely on a consistent, steady hand, some experts say.

To be sure, fiscal year 2016 was a bad one for the global economy and the university endowments it affects; about a dozen public universities with large endowments have posted losses so far this year, and the University of Pennsylvania reported negative 1.4 percent returns today. Even MIT, a rising star in the higher education investment world, posted 0.8 percent returns and was outpaced by the S&P 500 Index this year.

—Staff writer Andrew M. Duehren can be reached at andy.duehren@thecrimson.com. Follow him on Twitter @aduehren.

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