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Harvard Endowment Value Falls For Second Consecutive Year, Records Modest 2.9% Return During FY2023

Distributions Outpaced Investment Gains and New Contributions, Leading to $0.2B Endowment Decline

By Krishi Kishore and Rohan Rajeev, Crimson Staff Writers

The value of Harvard’s endowment fell for the second consecutive year, despite delivering a 2.9 percent return for fiscal year 2023, as distributions to school operations outpaced investment gains and new contributions.

The low investment returns, which generated just $1.3 billion, left the market value of Harvard’s endowment at $50.7 billion — down from $50.9 billion at the end of the previous fiscal year. The decrease comes one year after Harvard reported a $2.3 billion decline in endowment value during fiscal year 2022, representing the first time in two decades that the school has experienced two consecutive years of endowment drops.

Harvard’s peer institutions also reported lackluster returns. MIT and Duke University saw investment losses of 2.9 and 1 percent, respectively. Stanford University, Yale University, and the University of Pennsylvania reported respective investment gains of 4.4, 1.8, and 1.3 percent.

Harvard disclosed its fiscal year 2023 results on Thursday in its Annual Financial Report, which offers a rare glimpse into the University’s finances and investment strategy each October.

In a note included in the financial report, Harvard Management Company CEO N.P. “Narv” Narvekar wrote that the endowment’s low investment returns are consistent with market conditions in fiscal year 2023, which he called a year of “generally muted returns for asset classes outside of public equities.”

Public equity markets rallied in the second half of fiscal year 2023, which ended in June. The S&P 500 and NASDAQ indices rose by 16.9 and 32.3 percent, respectively, between January and June.

Despite the “dramatic equity rally,” Narvekar wrote that the endowment’s performance “does not reflect a significant impact from public equity movements” due to HMC’s “limited long-only public equity exposure.”

“This portfolio construction also helps brace against significant swings in either direction, as it did last year when the FY22 return (-1.8%) was not meaningfully impacted by an overall double-digit public equity decline,” he wrote.

Harvard’s endowment is heavily allocated towards alternative investment strategies such as private equity and hedge funds, which respectively accounted for 39 and 31 percent of its assets at the end of fiscal year 2023, according to Narvekar’s note. In contrast, just 11 percent of the endowment is invested in public equities.

While Narvekar disclosed the endowment’s asset allocation in his note, he did not provide a breakdown of investment returns by asset class, a longtime practice HMC abandoned last year. Since HMC did not release its asset allocation last year, the updated figures reflect changes in the company’s investments over the past two years.

HMC’s private equity portfolio reported “only slightly positive” returns during the fiscal year, while its venture capital investments experienced “mildly negative” losses. This result, Narvekar wrote, was expected despite the common trend that “strong public equity returns are often outpaced by private equity and venture capital.”

“In FY22 private managers did not reduce the value of their investments in a manner consistent with declining public equity markets,” he wrote. “Accordingly, those private asset managers did not subsequently increase the value of their investments in the context of rising public equity markets in FY23.”

“Given the continued slowdown in exits and financing rounds over the last year, it will likely take more time for private valuations to fully reflect current market conditions,” Narvekar added.

The allocation of Harvard’s endowment assets is based on portfolio risk level, which is set by the University and the Harvard Corporation — the school’s highest governing board. In his note, Narvekar acknowledged that the University’s risk tolerance has historically been lower than that of many of its peers.

“Looking back over many years, a main constraint on Harvard’s endowment returns has been that the portfolio was structured to take less risk than what was likely prudent,” he wrote. “The question of the amount of risk to take is not a simple one, as it must weigh, for example, budget stability against long-term growth in the endowment.”

The endowment distributed more than $2.2 billion toward Harvard’s operational budget, which comprised 37 percent of the school’s annual revenue, according to the financial report.

“HMC built an analytical risk framework and partnered closely with the University to help determine the University’s risk tolerance,” Narvekar continued. “After several years of rigorous conversation and analysis, the University agreed to a measured increase in the portfolio’s risk level, which HMC began implementing over the last two years.”

Despite the risk increase, Narvekar wrote that HMC still operates at a “somewhat lower risk level than many peer endowments.”

“Going forward, HMC will continue to work with the University to periodically review the appropriate long-term risk level and tolerance,” Narvekar wrote.

Reflecting on the endowment’s performance since his arrival to HMC as CEO six years ago, Narvekar cited asset allocation and manager selection as the main drivers of positive returns during this timeframe. Under Narvekar’s tenure thus far, HMC has delivered a 9.2 percent annualized return.

“Over the course of the last six fiscal years, the alpha generated by HMC’s manager selection has been very strong, greater than we would have anticipated,” Narvekar wrote. “Although we are confident that HMC will continue to do very well, it is hard to imagine that the next six years of alpha production can be as strong as the previous six years.”

Upon Narvekar’s arrival to HMC, he instituted a restructuring plan that shifted the vast majority of the endowment’s assets to external managers, spinning out in-house natural resources and real estate investment teams.

“Ultimately, we believe that the measured increase in risk — carefully calibrated to ensure long-term endowment stability — and the improved asset allocation (versus when we started, six years ago) will continue to generate strong returns even if the manager selection alpha attenuates,” Narvekar wrote.

—Staff writer Krishi Kishore can be reached at Follow him on X @tweetykrishi.

—Staff writer Rohan Rajeev can be reached at Follow him on X @rohanrajeev_.

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