HMC Considers Selling Real Estate Investments to Chinese Sov. Wealth Fund

Harvard Management Company is exploring options for unloading several of its real estate investments to China's $300 billion sovereign wealth fund, a move that could represent a significant change from an investment strategy that had stressed diversity of holdings before the recession struck.

According to a Wall Street Journal report, China Investment Corp., or CIC, recently approached the University’s money managers about a possible purchase of Harvard's positions in six real estate funds. The mammoth sovereign wealth fund, whose management and board of directors report to the Chinese central government, appears to be attempting to take advantage of persistently depressed real estate values.

In previous years, sovereign wealth funds' efforts to enter the U.S. real estate market via direct investments in properties have often met with public outcry and political impasses, but CIC's purchase into real estate funds may attract less scrutiny.

For HMC, a sale would represent a retreat from a sector that has suffered greatly during the recession. It comes just over one year after HMC reported a 50 percent loss on its real estate holdings in fiscal year 2009. In fiscal year 2009, HMC’s investments in “real assets”—a category that includes both real estate and commodities—fell by some $2.4 billion to $5.6 billion.

Harvard spokesman John D. Longbrake declined to comment, citing University policy not to discuss investments.

Harvard’s annual report for fiscal 2009 admitted that diverse holdings had not allowed the University to emerge from the financial crisis unscathed.

“While diversification has been a mainstay and a driver of the portfolio’s return over the long-term, the benefits of diversification did not bear out through the rapidly evolving and widespread events that unfolded in fiscal 2009,” the report stated.

HMC measures its performance against a theoretical “policy portfolio” allocated to various “asset classes,” chosen to give the University an appropriate level of risk. Since 1995, the portfolio has shifted away from domestic equities—then 38 percent of Harvard’s holdings—into more exotic assets including commodities and, to a lesser degree, real estate.

Though the policy portfolio remained unchanged, SEC filings in the fourth quarter of 2009 showed HMC moving back into the domestic stock market, though Harvard’s money managers moved away from the market again in the first quarter of 2010.

Last April, HMC announced a new managing director of real estate investments, after the position had remained vacant for over a year. The appointment of Daniel W. Cummings, a former managing director at private equity titan The Carlyle Group, came at a time when University officials scrambled to adjust budgets to accommodate a projected 30 percent drop in the endowment for the fiscal year.

—Staff writer William N. White can be reached at wwhite@fas.harvard.edu.