Harvard endowment plunges 22% in four months


Amidst the celebration of Senator Edward Kennedy (D-MA) came the startling news that the University’s endowment has lost 22% of its value, or $8.1 billion, in the four months from June 30-October 31. That performance dramatically underperformed the overall market, which declined 18% over the same time period, as measured by the Dow Jones Industrial Average. The most that the endowment had ever declined in a single calendar year was 12.2 percent in 1974. At that time, according to an email send to the Council of Deans by University President Drew Gilpin Faust, the “endowment stood at less than $1 billion and funded a much less significant proportion of University operations.”

The unprecedented decline in endowment assets signals that the Harvard Management Company maintained a portfolio of considerable risk, even as financial clouds began to gather, undermining credit markets and plunging the world into global recession. It is but the latest in a series of high-profile controversies for HMC, which came under fire for paying its six highest-paid managers a combined $107.5 million in 2003 and from students for its investments in Petrochina in 2005 (leading HMC to divest, but only after the investment reaped huge gains).

In a departure from the traditional tight-lipped attitude regarding endowment returns, Faust sent an email to the Deans of all schools with a mid-year update and what the decline in assets would mean for the University and its schools. The email is excerpted below.

“As has been reported, the value of the University’s endowment was $36.9 billion on June 30, 2008, the end of the last fiscal year. Since then, the severe turmoil in the world’s financial markets has affected all major asset classes in which the endowment is invested.

While historically Harvard has reported investment returns only at the end of the fiscal year, in the current extraordinary circumstances we believe it is critical that our efforts to plan responsibly be informed by a more widely shared understanding of what we expect.

The Harvard Management Company…has calculated investment losses of approximately 22 percent from July 1 through October 31. Yet even that sobering figure is unlikely to capture the full extent of actual losses for this period, because it does not reflect fully updated valuations in certain externally managed asset classes, most notably private equity and real estate…With those considerations in mind, and in view of the uncertain outlook ahead, we continue to plan for a scenario in which our endowment is down 30 percent in value for the year…Since [1974], there have been only three years of negative performance, with returns ranging from -0.5 percent to -3 percent. We will of course hope to do better this year than we are now planning, but we need to plan with a clear-eyed view of the reality that confronts us, as best we can gauge it.

Income distributed from the endowment now funds roughly 35 percent of the University’s overall operating budget, and some of our Schools rely on endowment income to cover more than 50 percent of their expenses. The prospect of significant endowment losses therefore has major implications for our budgets and planning…The implications will differ in degree from school to school and department to department. But all of us will need not merely to contemplate changes at the margins, but to take a more fundamental look at how to align our spending with revenues that will be significantly reduced from what we had imagined just a few months ago.

In so fluid and unpredictable a financial environment, it is particularly important to maximize our flexibility…Toward that end, we are planning to take advantage of Harvard’s strong credit ratings to increase the University’s flexible cash resources in the near term…

Given our planning assumption about endowment losses and our desire to buffer the near-term impact to a reasonable extent, we also expect that we will be spending a higher percentage of the endowment next year than we have in the recent past.”

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