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Harvard Has The Largest University Endowment in the World. CFO Hollister Says It Has Its Limits.

The Harvard Management Company manages Harvard's endowment and related financial holdings.
The Harvard Management Company manages Harvard's endowment and related financial holdings. By Steve S. Li
By Ellen M. Burstein and Camille G. Caldera, Crimson Staff Writers

As the coronavirus pandemic devastates the global economy, Vice President for Finance and Chief Financial Officer Thomas J. Hollister said in a Thursday interview that administrators will seek to balance the University’s long-term financial welfare with its need for immediate financial support when utilizing the school’s endowment.

As of June 2019, the endowment was valued at $40.9 billion. Hollister noted Thursday that its value has likely declined “substantially” as the stock market reels from shuttered businesses and record unemployment.

Hollister cited an estimate published last month in the Harvard Magazine that put the value of the school endowment’s in the “mid-30 billion range,” and called it “one reference,” but declined to specify the current value of the endowment.

“I'm not going to estimate because it's difficult, mid-quarter to know,” Hollister said. “And the endowment is not made up just of stocks. It also has bonds and other asset classes, and it just would be inaccurate or almost irresponsible to conjecture exactly where it might be.”

A hit to the endowment will have a tangible impact on University operations, Hollister said.

“The endowment is very actively used,” he said. “It's the largest source of revenue for the University, and every penny that can be distributed and used for annual operations is so distributed. Harvard aims — similar to other universities and colleges — to distribute about 5 percent of the market value of the endowment every year.”

Likewise, a contraction in the endowment correlates to less funds to distribute across the University, Hollister said.

In an email to affiliates on Monday, University President Lawrence S. Bacow, Executive Vice President Katherine N. Lapp, and University Provost Alan M. Garber ’76 said that they would “distribute as much from the endowment as we responsibly can.”

Hollister declined on Thursday to specify what a “responsible” amount entails.

“That's to be determined. The distribution for this current fiscal year, which ends in June, that decision was made some time ago,” Hollister said. “So the challenge will be in the next fiscal year and the fiscal year after that and the fiscal year after that.”

“But the backdrop issue is that if the endowment has lost value, it makes it very difficult, obviously, to increase,” he added.

Hollister said that there are other “limitations” to drawing funds from the endowment. The first limitation is the make-up of the endowment, which consists of over 13,000 separate funds.

“Each is an underlying legal contract with the donor to use the money as the donor requires, and so it's restricted,” Hollister said. “There's a lot less flexibility in the use than people imagine.”

The second limitation is the need to generate future endowment returns.

“The money was given to the university for future generations, and not just the current generation,” Hollister said. “Consequently, what we try to do is spend roughly 5 percent a year, because the rest of it hopefully is earning returns to be available for future generations.”

Hollister said past generations of Harvard affiliates used the endowment sparingly in times of crisis, citing the World Wars, the mid-1970s, and Great Recession in 2008.

“In past downturns, previous generations have lived with hardships and adversity to protect the endowment so that it's available for today's students,” Hollister said. “To honor that tradition, Harvard — consistent with the donors’ terms and with that fiduciary responsibilities — needs to protect some of it for future generations. You can't take it all and spend it now because it's restricted as to purpose and restricted as to when it can be used.”

Despite having the largest endowment in the nation, Hollister cautioned that the University’s wealth is limited.

“Maybe there was a time when Harvard had unlimited wealth but it is not true today,” Hollister said. “Harvard is in the well-resourced category of universities, but if you actually divide the Harvard endowment per student or per faculty member, there are wealthier institutions in the country.”

Hollister said that shrinking revenues would make it difficult for the school to operate, pointing to “key things at Harvard” like undergraduate financial aid that are not entirely endowed.

“If our revenues shrink, and the endowment shrinks, it becomes very challenging for Harvard,” Hollister said.

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

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

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