Endowment Growth Slows

Following banner returns in fiscal 1993, it appears that the growth of Harvard's endowment has slowed substantially in fiscal 1994.

Officials at the Harvard Management Company (HMC), which manages the University's assets of roughly $6 billion, report that the endowment's performance slacked off considerably during the third quarter of this year, mirroring trends in the market as a whole.

The lower rate of return follows a relatively good start to the fiscal year, which began in July, 1993.

Between January and April, the endowment went through a rocky period in which it grew only.1 percent. The precipitous drop followed a nine percent return through the first half of the year.

These numbers indicate that HMC will almost certainly not equal last year's 16.7 percent growth, the best performance in several years.

The 1993 returns placed Harvard in the top quartile of university endowment performance over the same period.

Harvard's endowment--the largest of any University in the world--returned 11.8 percent in fiscal 1992 and 1.1 percent in fiscal 1991. In those years, Harvard was outperformed by 71 percent and 95 percent of comparable university endowments respectively.

This year, however, world financial markets have been struggling, and Harvard's performance appears to reflect that.

Markets, Policy Portfolio

During the early part of this year, the Standard and Poor's 500, a broad collection of stocks that generally reflect the market's performance, fared much worse than HMC, falling 3.6 percent.

HMC officials have noted that the company also outperformed its own policy portfolio, an internal benchmark based on Harvard's long-term asset allocation plan.

But the fact that HMC has performed relatively well is not enough to answer recent criticism from outsiders regarding its performance and compensation structure.

The S&P 500 is a very conservative indicator and a management firm which takes risks, as HMC does, should outperform it, critics have charged.

Critics have also said that HMC's system of internal performance benchmarks allows the company to make itself appear to be doing better than it actually is.

High Salaries

HMC managers' incomes reached record heights this past year. Six employees earned at least $800,000 from bonuses, salaries and benefit plan contributions, according to HMC's 1993 tax returns.

At least eight HMC officials earned much more than President Neil L. Rudenstine's approximately $200,000 salary.

The huge bonuses earned by the managers are determined by their performance relative to the policy portfolio. This practice especially has come under fire from critics, some of whom have even termed the HMC compensation structure "disgusting."

Last year's income leaders were HMC Vice President Jon Jacobson, equity and portfilio manager, and Vice President David Mittelman, director of fixed income investment. Both earned more than $1.2 million.

HMC President Jack R. Meyer who himself earned $962,213, had no comment regarding the salaries paid to company officials.

These salaries are the highest in the country for endowment managers employed by a university.

Compared to other institutions, however, Harvard does not appear to be any more successful in terms of performance relative to compensation.

According to a comparison of the long-run returns of the 10 largest university endowments reported last July in The Wall Street Journal, Harvard paid the highest price for its investment management but received a below-average annual return of 14.9 percent between 1983 and 1992.

During this time, only one other institution had a money manager making more then $300,000, while Harvard had at least six earning at least $400,000.

HMC defenders characterize these salaries as necessary to attract top Wall Street talent.

But, critics say, Harvard and Wall Street are two different places. The Harvard managers have far more job security than their counterparts on Wall Street, and are paid far more than managers at other universities.

In fiscal 1991, for example, the $1 billion holdings of the Aeneas Fund, HMC's high-risk private investment subsidiary, were devalued by roughly $200 million.

Critics of HMC have said that in a normal investment firm,. the man agers of that portfolio would have been fired. At Harvard, however, managers Scott M. Sperling and Michael Eisenson paid for their error through smaller performance bonuses that year.

Also, other universities such as Yale have paid far less for better performance. Even in HMC's self-described "amazing year" of fiscal 1993 Yale beat it with a 17.3 percent return. Yale has outperfomed Harvard for five straight and eight of the last 10 years.