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COVID-19 Leaves Harvard in ‘Grave’ Financial Situation, Experts Say

A coronavirus-induced recession could hit Harvard's endowment.
A coronavirus-induced recession could hit Harvard's endowment. By Steve S. Li
By Ellen M. Burstein and Camille G. Caldera, Crimson Staff Writers

The novel coronavirus pandemic has nearly emptied Harvard’s campus, sending students and faculty home for the remainder of the semester. It has also plunged the world into what Rutgers Business School professor John Longo called “the most serious financial crisis since the Great Recession and perhaps the Great Depression.”

“Huge swaths of the economy have been shut down with no clear sign that the bottom is near,” Longo wrote in an email to The Crimson. “Financial markets are in a state of panic, despite attempts by the Federal Reserve and the federal government to stem the decline.”

Experts like Longo say that the impact of coronavirus on the global financial sector presents risks to the University — namely, through its endowment.

Harvard retains most of its wealth in the endowment, which totalled $40.9 billion in June 2019. It’s also the single largest source of revenue supporting the University, comprising 35 percent of its operating budget.

Darrell Duffie, a professor at Stanford University’s Graduate School of Business, said Harvard’s endowment will likely shrink due to the volatility in the market.

“Financial markets are reflecting a very big macroeconomic shock,” Duffie said. “What was 40 billion is going to be a lot less by the time the devaluations are marked into it.”

Patrick S. McKiernan — a spokesperson for Harvard Management Company, which manages the endowment — wrote in an emailed statement that while they are monitoring the situation, HMC is focused on its long-term financial stability.

“While we always seek to mitigate the effects of market downturns on our portfolio — and capitalize on them when we can — the ten-year and twenty-year investment returns are where our sights remain focused to ensure the endowment can support the University’s mission in perpetuity,” McKiernan wrote.

The University's endowment is allocated into different asset classes — each of which will reflect the shock differently. For example, 26 percent of the endowment is in public equities, the prices of which are already down about 25 percent, according to Duffie. Based on those figures, Duffie estimated that the endowment has already lost “at least 6 percent of market value” in public equities alone.

Longo estimated that the portion of the endowment invested in public equities has “very likely taken a double digit hit.”

Another 20 percent of the endowment is in private equity, and 33 percent is in hedge funds, per the University’s 2019 financial report.

Duffie said that the performance of private equity funds and hedge funds under current conditions will vary.

“Some will do well, some will do very badly,” he said.

Overall, though, he said he expects losses.

“I assume they’re going to be down, perhaps substantially, because hedge funds tend to take more risk than the kinds of risks we see in public equity markets,” he said.

Longo predicted that hedge funds could help cushion the blow from private equities.

“Hedge funds are a broad asset class, but it is conceivable that Harvard’s market neutral and long/short hedge funds actually delivered positive returns,” Longo wrote in an emailed statement. “If this is the case, it would materially soften the blow from the sharp drop in equities from around the world.”

As for private equity funds, Longo wrote that, because they tend to be valued with a lag, it “may take a while to get a true picture of the endowment’s performance during the current bear market.”

In the aftermath of the Great Recession in 2009, the total value of the endowment declined almost 30 percent — equal to $11 billion of the then-$37 billion endowment.

Timothy J. Keating ’85, the president of Keating Wealth Management, wrote that the current situation is “directly comparable” to that period, with regard to short-term investment returns. After the 2009 crash, the endowment’s invested assets took a 27.3 percent hit.

Thomas D. Parker ’64, a senior associate at the Institute for Higher Education Policy, wrote in an emailed statement that the University’s financial situation is “grave.”

“Along with most of its peers, Harvard has huge fixed costs which can’t be easily shed or diminished,” Parker wrote. “Tenure limits its ability to downsize faculty; Harvard has enormous pension and retirement health benefit obligations. It’s impossible to imagine a scenario in which the endowment, especially in its diminished state, can spare Harvard from major reductions in operating costs.”

Parker wrote that that situation could pose major challenges for the University.

“Spending down an already drastically diminished endowment in order to avoid reducing operating expenses could be the beginning of a death spiral in which endowment shrinkage multiplies,” Parker wrote.

Keating also theorized that the crisis could impact another source of the University’s revenue — the amount of donations it brings in.

“I suspect the most immediate impact will be on alumni giving,” he wrote.

Duffie agreed that there’s a chance donations could drop, since “the people that give gifts to Harvard may themselves be affected,” he said.

“On the other hand, people that give gifts that are in a good financial position may see that Harvard could benefit, especially now, from additional donations, so they might be even more forthcoming than normal,” Duffie added.

In response to concerns about the revenue streams of colleges and universities across the country, Moody’s Investors Service — a credit rating agency — flipped its rating on the financial outlook of the higher education sector from “stable” to “negative” on Wednesday.

“Universities face unprecedented enrollment uncertainty, risks to multiple revenue streams and potential material erosion in their balance sheets,” the report from Moody’s read.

Still, both Duffie and Parker said that Harvard is relatively well-situated for the crisis.

“The University as a whole has an excellent reputation, that has lots of resources beyond its endowment, including new fundraising and new development fundraising, so Harvard is in a very strong position,” Duffie said.

Parker credited University President Lawrence S. Bacow, who is an economist by training, for working to prepare the University for the next recession since he took office in 2018.

“Larry Bacow deserves credit for flagging ‘recession planning’ as a priority two years ago well before most of his colleagues,” Parker wrote. “This should enable the administration to better execute the difficult reductions in expenses which are now inevitable.”

University spokesperson Jason A. Newton said that the current state of affairs evidences why Harvard engages in such planning.

“This is a rapidly evolving situation that illustrates why we practice contingency planning as a precaution,” Newton wrote in an emailed statement. “The University will continue to leverage its contingency planning to inform and help guide our decisions for the future.”

Duffie also emphasized that the long-term financial consequences of coronavirus remain uncertain.

“We’re still in the early stages of this. We don’t know much and people shouldn’t jump to conclusions,” Duffie said. “We’re in a period of high uncertainty, so it’s going to take a little while before we get a better sense of what are the true market values, and how different investors are going to come out of this.”

Much of the future depends on how the market responds to the changing circumstances in the coming weeks and months.

“The impact of market declines on Harvard’s expenditures are unclear at this time. If weakness persists, then it is likely that there will be cuts to planned expenditures,” Longo wrote.

—Staff writer Ellen M. Burstein can be reached at Follow her on Twitter @ellenburstein.

—Staff writer Camille G. Caldera can be reached at Follow her on Twitter @camille_caldera.

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