Harvard endowment gains 11%, but trails market

By Beth Healy
Globe Staff / September 10, 2010

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Harvard University’s endowment climbed 11 percent for the year ended June 30, adding $1.4 billion to the school’s wealth but underperforming other large funds and the stock market.

The nation’s largest endowment, with $27.4 billion in assets, benefited from rebounding markets, as stocks rallied and nearly every investment category posted gains through the first few months of this year, according to the annual report from Harvard Management Co., which oversees the fund. US and foreign stocks were among the best performers, with double-digit gains, along with private equity — investments that had helped drag the fund down a stunning 27.3 percent amid the financial crisis in fiscal 2009.

“In comparison to one year ago, our portfolio and our organization are now significantly better positioned to continue to deliver strong long-term returns as well as actively manage our risks,’’ the endowment’s chief, Jane L. Mendillo, wrote in the annual report released yesterday.

The fund beat its internal benchmark of 9.4 percent for the year but came in under the median 13.3 percent return for large funds tracked by the consulting firm Wilshire Associates. With a broad mix of stocks, bonds, hedge funds, natural resources, and other investments, the endowment has often trounced the stock market, but not this year: the Standard & Poor’s 500 Index rose 13.9 percent. Harvard also lagged the state’s $41 billion pension fund, which gained 12.8 percent in the fiscal year.

Mendillo has characterized the two years since she took over the fund as a restructuring period. She has reorganized the staff, hired a number of new top reports and has focused on keeping the endowment more liquid, after the market’s historic turmoil in late 2008 left the fund, and the university, in a cash crunch. She kept 2 percent of the endowment in cash last year, an about-face from the many years in which the fund had negative cash, as it borrowed to invest even more aggressively.

She indicated she is content with the changes in the portfolio, saying, “we are pleased to have a well-diversified portfolio with some room to move.’’

The endowment provides 35 percent of the university’s total annual budget, helping to pay for everything from professors’ salaries to the various schools’ operations, including Harvard Business School. The university, which had also invested its operating cash in the endowment, had to issue debt last year to make up for sharp losses. The school laid off workers and halted its Allston campus expansion.

Having set aside some of the fund’s cash in order to take advantage of opportunities, Mendillo wrote, Harvard made several new real estate investments during the year. Real estate was the only asset class to fall in value last year, but Mendillo is bullish on the sector.

Meanwhile, Mendillo has reduced by 20 percent the number of outside firms that Harvard hires, including hedge funds, to manage slices of its assets. She said the endowment has been more aggressive in both selling and buying partnerships in real estate and private equity funds, unloading stakes it no longer likes and concentrating on top-performing managers.

The report says Harvard has cut back its future capital commitments to real estate and private equity funds to $6.5 billion from over $11 billion two years ago. Mendillo is interested in bringing more assets in-house, to keep greater control of the endowment’s money. When the markets froze in 2008 and 2009, Harvard, like other large investors, found its cash locked up by numerous managers. She wrote, “I do think that it makes sense to increase the share of internally managed assets under the right conditions, given the added agility and cost effectiveness of managing money this way.’’

Mendillo is working to convince faculty, alumni, and others with a deep interest in the endowment that it’s worth paying multimillion-dollar incentive packages to internal managers who perform well. Harvard Management said its expenses for running the fund have averaged less than 0.3 percent of assets over the past five years, according to a consultant it hired to review costs.

Mendillo said that was substantially less costly than the 1.5 percent to 2 percent that outside hedge funds charge, on top of the 20 percent cut they take of investment gains. She said the internal managers have saved Harvard more than $1 billion in fees over the past decade.

Beth Healy can be reached at