Harvard’s Endowment Shined in 2024. But It Masks a Longstanding Gap With Ivy+ Peers.

Updated November 20, 2024, at 4:05 p.m.

When Harvard Management Company CEO N.P “Narv” Narvekar released the University’s annual financial report last month, he announced that the value of Harvard’s endowment grew in value for the first time since fiscal year 2021.

Narvekar’s 9.6 percent return in fiscal year 2024, which ranked third among Ivy+ peers and raised the total value of Harvard’s endowment to $53.2 billion, marked a clear bright spot for the University as the endowments at schools like Yale and Princeton reported returns that just beat inflation.

In the annual financial report, Narvekar touted his strong performance as “encouraging, less for its one-year return than for the trend it continues to reflect.”

But in interviews with financial experts and Harvard affiliates, many expressed concern about the endowment’s long-term performance, which has underperformed compared to other Ivy+ schools and the S&P 500 — an index tracking the stock performance of the 500 largest companies that serves as a common benchmark for investors.

“One should never evaluate endowments based upon yearly return,” W. Bentley MacLeod, a professor of economics at Princeton University, wrote in a statement to The Crimson.

“This is similar to the difference between weather and climate,” he added. “Getting snow in, say, November does not mean there is no climate change.”

Shortly after Narvekar took over the HMC in 2017, he announced a five-year plan that delivered a sweeping overhaul of HMC, dismantling its traditional internal management structure in favor of external management through hedge funds and private equity firms to boost returns.

But the modifications made to the endowment structure, modeled after Narvekar’s own strategies from his tenure managing Columbia’s endowment — which beat the returns of Harvard back-to-back years — have failed to yield immediate results for the University and outpace the long-term return rates of higher education’s largest endowments.

The average return rate over the past five fiscal years from 2020 through 2024 for the largest five endowments — Harvard, Yale, Stanford, Princeton, and MIT — was 11.2 percent. Among this group, Harvard had the lowest returns.

But after his success this year, Narvekar is hoping that Harvard will soon begin to see the long-term benefits of his efforts to change the endowment’s investment strategy.

“The work HMC has undertaken to reposition the endowment for long-term success is clearly visible and the risk-adjusted returns to date show we are on the right track,” Narvekar wrote in the financial report.

The endowment’s critical role in covering almost 40 percent of Harvard’s operating budget — the highest monetary contribution of any of its Ivy+ peers — limits its ability to tolerate the same level of risk and volatility as the S&P 500 and many other funds in higher education.

Harvard’s cautious approach contrasts with other Ivy+ peer endowments.

Brown has managed to deliver the Ivy League’s leading five-year return rate of 13.3 percent, consistently outperforming its peers by embracing a more aggressive investment strategy. Brown has the second-highest risk levels among the Ivy+, even though its endowment size is relatively smaller than Harvard’s.

Princeton and Yale, whose endowment returns in 2024 were eclipsed by Harvard, take on more risk and have historically outperformed the University over the past five years.

“Yale and Princeton have higher long-term returns than Harvard, while Harvard has the lowest standard deviation, consistent with them following a more conservative strategy relative to Princeton and Yale,” MacLeod wrote.

“If anything, you could make the point that Havard is underperforming because they take less risk,” he added.

Harvard currently allocates the majority of its portfolio to private equity and hedge funds — a strategy designed to limit overall portfolio risk.

This shift toward private equity and away from public markets have been a trademark of Narvekar’s management.

However, this perceived reduction in risk by limiting public exposures and increasing private equity holdings is not entirely insulating the endowment from risk, according to Harvard Economics professor Jason Furman ’92.

“Some of Harvard’s risk reduction is illusory — private equity funds can be very risky even if they don’t update their values daily like the stock market does, providing a false sense of security about the overall portfolio,” Furman wrote.

HMC spokesperson Patrick S. McKiernan declined to comment on criticisms of the endowment’s performance.

Narvekar noted in his annual message this year that the private managers to whom Harvard outsourced management “did not subsequently increase the value of their investments in the context of rising public equity markets in fiscal years 2023 and 2024.”

Private equity investments, which are valued based on estimates by the external managers rather than real-time pricing, presented challenges for many endowments. Harvard and its Ivy+ peers had the ability to mark down private equity investments in fiscal year 2024 as they adjusted valuations to reflect earlier market declines.

Harvard’s relative outperformance this year may reflect differences in timing of external management conducted adjustments allowing for more accurate valuations of its investments through markdowns on previous years returns.

Other Ivy+ peers, particularly Yale, made valuations higher than the true values in past years, requiring them to adjust their valuations and then mark down the funds — which allowed Harvard to outperform them in fiscal year 2024.

“It is a fraught exercise, and as Mr. Narvekar notes in his discussion, a lot of endowments did not mark down their private equity investments far enough in 2022, which was a very bad year for this asset class,” David L. Yermack ’85, a professor of finance at the NYU Stern School of Business, wrote in a statement to The Crimson.

“Apparently Harvard did so back in 2022, and today it is no longer stuck with the problem of having to reduce these investments’ estimated values further and further each year to reflect reality,” wrote Yermack, a former Crimson managing editor.

This “marking to market” process is when endowment managers assign a new valuation to their investments made by external managers each year — in contrast to stock prices that are tracked in real time. The mark-down process is challenging as changes in prices are not as readily accessible as they are in liquid public markets like stocks and bonds.

Yale overestimated its private equity gains when marking them to market in 2022 — a factor that likely contributed to its returns falling roughly 5 percentage points below those of Harvard this year.

“In a nutshell, that is probably why Harvard is reporting better endowment returns for 2024 relative to other large universities,” Yernack wrote.

While Harvard managed to deliver some of the strongest returns among Ivy+ peers this fiscal year, critics were quick to draw attention to the University’s performance relative to the S&P 500, which returned 21.1 percent.

“While I’m always happy to see Harvard beat Yale and Princeton at just about anything, I would be even happier to see us beating the S&P 500,” Furman wrote.

Harvard for decades has consistently underperformed the S&P 500 as the University is unable to take on the risk that public markets bear, but many Harvard affiliates have called for the endowment returns to meet those of stocks and the broader market.

“Universities owe it to stakeholders to explain why returns on endowments often underperform simple indexes, such as the S&P 500,” Maya Sen ’00, a professor of public policy at the Harvard Kennedy School, wrote in a statement.

“These questions are important because Harvard — like other research-driven universities — is a place where any additional positive returns on the endowment would have incredible downstream benefits, not just on research and teaching, but on all facets of university life,” she added.

Harvard’s struggle to match the returns of the S&P 500 has long been a point of contention, with critics arguing that this underperformance deters potential donors.

“If I were a donor or financially knowledgeable alumnus, I would be very disappointed, not only with this year’s investment returns, but with the underperformance that has persisted in Harvard’s endowment for a long, long time,” Yermack wrote.

Clarification: November 20, 2024

This article has been updated to clarify that the five-year endowment return rates are calculated based on an aggregated average of endowment returns from 2020 through 2024. These rates are not annualized or rolling but represent a cumulative average.

—Staff writer Sidney K. Lee can be reached at sidney.lee@thecrimson.com. Follow her on Twitter @sidneyklee.

—Staff writer Thomas J. Mete can be reached at thomas.mete@thecrimson.com. Follow him on Twitter @thomasjmete.