What To Do With A Zillion Dollars

Good, clear information about how finances work is as hard to come by as an honest man. Good, clear information about how Harvard's finances work is as hard to find as Diogenes's corpse.

Thousands of pages are published by the University every year giving facts and figures and charts and tables for every detail of Harvard's money machinery. But without some overall context in which to set these details, the available information is understood only by those who work directly with Harvard's money and know the answers anyway.

A persistent outsider can decipher a small part of Harvard's financial hieroglyphics, but even such a hard-earned glimpse may give a misleading idea of what's really written on the Rosetta stone. This article is offered as a humble effort at adding a little light to the great wealth of darkness that surrounds everything having to do with Harvard's riches.

What is the endowment and why should I care about it?

The endowment is the enormous mass of stocks, bonds and miscellaneous holdings that Harvard currently owns. The endowment's total market value, or amount of money that Harvard could get if it sold all of its investments, currently amounts to over $1.4 billion, making Harvard the wealthiest university in the world. (This amount of course, does not include the value of the campus's real estate, buildings, or other facilities not currently earning a profit.)

Harvard's endowment is so large that the next richest school, Yale, has an endowment over half a billion dollars less. And of the total endowment of all universities in the United States, Harvard's endowment makes up nearly one tenth.

None of this enormous sum is spent. Instead, the money sits in various investments, and continually grows -- last year at a rate of 7 and one half per cent annually.

If none of the endowment is spent, what good is it?

Although none of the endowment is spent, it provides money to the University through what is called "income" from investments. This is not the same sort of income that the layman talks about when he files his income tax forms. Investment financiers define investment "income" as the money earned from interest on bonds and dividends on stocks. But as any amateur stock market speculator knows, stocks do a lot more than simply draw dividends -- they bring their most dramatic earnings through increases in value on the stock market. These earnings, which are less regular because they are dependent on the health of the economy and the luck of the investor, are called "capital gains." As a set policy, Harvard never spends capital gains, but instead allows them to accumulate for reinvestment, making the endowment grow.

The theory behind Harvard's system of investment management is that it is necessary to keep the endowment growing in order to insure that "income" (which comes out to about 4 per cent of the total) continues to grow in pace with inflation.

An analogy that may help clarify Harvard's reasons for its investment policies could be made between the endowment and a fruit-bearing tree. "Income" would correspond to the fruit, while capital gains would correspond to the growth in the size of the tree. Under Harvard's investment policies, only the fruit is allowed to be picked and sold for money to cover current university expenditures. The additional growth of the tree, in terms of new branches and height, should not be chopped off and sold for firewood because if this is done, the amount of fruit will not increase next year in pace with costs.

But this analogy is loaded in favor of the current investment policies that Harvard practices. Although fruit and branches are distinctly different substances, "income" and "capital gains" are really the same thing -- money. The decision to keep capital gains in the endowment and to define usable income as dividends and bond interest is basically a matter of conservative financial habit, not of any accepted pattern of economic rationality.

Even the University Committee on Governance, which was chaired by former dean of the Faculty John T. Dunlop, agrees that the difference between "income" and capital gains is simply one of arbitrary definition. "The distinction makes no economic sense," the committee reported in November 1970. "After the fact, and at any point in time, a dollar of realizable capital gains [that is, capital gains whose value can be turned into spendable dollars through sale of stock] is exactly equivalent to a dollar of 'income.'"

But even though the distinction is not dictated by economic rationality, it is not totally lacking in logic. The arbitrary decision to use capital gains for increasing the endowment is simply a handy device for deciding what part of the total earnings (capital gains and "income") should be kept in the endowment. There is a strong case for reinvesting a certain amount of the total earnings back into the endowment in order to insure that the endowment will increase enough to provide the University with money to pay for increasing costs due to inflation.

Money from the endowment is likely to become more and more important in the next several years. At present, income from the endowment pays for about a quarter of Harvard's operating expenses. Three other sources -- government grants, private donations, and tuition and boarding charges -- pay for the balance. But government aid to education is steadily dropping, private gifts are unreliable, and tuition can only be expected to rise as fast as inflation. With the University facing a higher rate of cost inflation (estimates range from 5 to 7 per cent) than the general public, the endowment is likely to be called upon to carry an increasing share of the burden.

How did the endowment get there in the first place?

The endowment is as old as Harvard itself. It was born of the same father as the University. In establishing the College in Cambridge, John Harvard put up the modest sum of 800 pounds sterling or roughly $2500 to finance the first institution of higher learning in England's American colonies.

Rev. Harvard's small sum increased at a modest rate, mostly through private donations. By 1854, 218 years after the founding, the endowment broke the million mark.

When President Eliot began his term of office in 1869, the total figure was $2.5 million. At the start of the Lowell era forty years later, the endowment reached $22.5 million. As President Conant assumed office in 1933, it totalled $126 million. As Pusey was inaugurated twenty-one years ago, the figure was $360 million. By 1965, the billion dollar mark was broken.

Ascertaining exactly how much of this enormous increase was due to gifts or due to sound investment practices is hard to say; but it is safe to wager that the great part of the increase was due to capital gifts rather than capital gains.

And these gifts have posed some problems of their own aside from strict dollar value. Although the Harvard Administration would doubtless prefer that all donations be made without restriction as to their use, the donors usually feel otherwise. Because of the large number of conditions that donors put on how their money is to be used, the greatest part of Harvard's endowment, and thus the income earned on it, is restricted to special purposes.

Currently 90 per cent of Harvard's funds are restricted, and these restrictions in most cases never expire. One Thomas Cotton gave the University $156.13 in 1727, and specified that the yield on this mass of capital be used to help support Harvard's President. To this day, President Bok receives a sum of something over six dollars from this account annually.

Often the gifts Harvard receives are not in the form of cash. Many donations consist of blocks of stock, plots of land, and occasionally things more bizarre. In 1963, the University acquired a stamp collection appraised at $16,000, but on it were two conditions: that the money be used to establish a scholarship fund, and that the stamp collection not be liquidated until 2013. Harvard's Treasurer, George F. Bennett '33, keeps the collections recorded in the University ledgers at a current value of one dollar.

The conditions on some gifts verge on the absurd. In this category would go the famous donation of the mother of Harry Elkins Widener, who insisted, among other things, that all students be required to swim 50 yards before graduating from Harvard. Less well known is the case of a recent donor, a Medical School alumnus, who required that the income from his grant to the med school go to a student renowned for extracurricular activity and "medical unproductivity and scholastically idle diversion." If no student of these qualifications could be found, the money must go to the Medical student deemed least likely to succeed.

Harvard will accept almost any donation, unless the donor requires that the University forbid certain activities as a condition of the gift or unless the donor tries to impose restrictions on the use of the money that would constrain the freedom of ideas. A recent offer to endow a series of lectures against careers for women was refused on these grounds, as was a gift to the Med School for "the application of music to medical cases as a treatment."

How does Harvard decide what investments to put its endowment capital in?

Before 1920, Harvard kept almost none of its investments in common stocks, the sources of all of today's corporate responsibility issues. Prior to that, most of Harvard's money sat in bonds, mortgages, real estate and annuities.

Today, common stocks make up 63 per cent of the University's total holdings, while bonds comprise 34 per cent. (The balance consists of preferred stocks, loans and miscellaneous investments.)

Harvard's overall investment strategy is to try to maximize both capital gains, and thus growth of the endowment, and income to be used for current expenditures. Because income is arbitrarily defined as interest on bonds and dividends on stock, bonds are the stronghold of income, while common stocks provide almost all the capital gains and some of the income. Last year, bonds provided more than 50 per cent of the income even though they make up only a third of the portfolio.

Within the vast holdings of common stock, investment decisions are made according to a highly complex system which is often strikingly similar to legalized gambling. These decisions are made exclusively in the office of the investment counseling firm that manages Harvard's endowment. This firm, the State Street Research and Management Company, is headed by Treasurer George Bennett.

Bennett makes biweekly reports to the Harvard Corporation, which is charged with reviewing his decisions. He invites questions and comments on investments he has made or might make, but he then exercises his sole discresion in making individual investments.

How do social concerns enter into investment policies?

Until last Spring, the answer to this question was very simple: They don't. But since then, the Corporation's attitude has undergone some change. Prior to last Spring, the Corporation had always followed Bennett's recommendations on how to vote shares of stock at the annual shareholders' meetings of the many corporations in which Harvard invests. But as of this Fall, President Bok has set up a special Corporation subcommittee to decide on controversial shareholder resolutions, with the advice of a student-faculty-alumni Advisory Committee on Shareholder Responsibility (ACSR).

But in actuality, none of these changes has affected investment policy at all. Although Harvard has now voted against management in several shareholder resolutions, no true changes in investment -- in what stocks Harvard chooses to own in what quantities -- have been made.

Nor are they likely to be made. As outside sources of funding, such as the Federal government, continue to dry up, the financial burden that the endowment will have to bear is bound to grow. And as this burden grows, the leeway for considering any factors outside of profit maximization is shrinking. Like a high-speed racing car ignoring the pollutants with which it fouls the air, Harvard will probably continue an investment policy designed to amass capital and provide income without regard for social consequences. Harvard's Top Ten Investments   shares  market value 1. IBM  194,299  $76,165,208 2. General Reinsurance  81,162  $33,032,934 3. Eastman Kodak  245,564  $32,567,925 4. Texaco  837,139  $27,207,017 5. General Motors  269,257  $20,160,617 6. Exxon  266,956  $19,788,113 7. Ford    $18,770,563 8. ITT  322,607  $16,815,889 9. Gulf Oil  686,797  $16,740,676 10. General Electric  225,253  $14,810,384     *as of June 30, 1972