Endowment Balloons in Huge Growth Year

Harvard's coffers swelled to roughly $11 billion this year, as Harvard Management Company (HMC), the keeper of the University's endowment, reported returns of 25.8 percent for the fiscal year ending this June.

Harvard's endowment grew faster than Princeton's, Dartmouth's and Yale's, and Harvard's team of investors beat all the benchmarks set by the company's board of directors-largely Harvard administrators-to gauge their performance.

"It's a stunning performance, truly outstanding," said President Neil L. Rudenstine in an interview last week. "It's certainly true that the markets are doing very well, but if you [compare us with the benchmarks], I think you'll find we've outperformed substantially."

HMC is a wholly-owned subsidiary of Harvard charged with managing the University's endowment. While many colleges and universities use independent managers, Harvard runs its own investment firm.

But with the good news, University officials warned that the pennies won't fall from heaven forever.

"Now we've had three good years and everyone thinks we've landed in Nirvana," Rudenstine said. "We cannot expect our markets to keep going like this...The changes could be quite drastic."

Meyers agreed that the University has had Lady Luck in the pocket.

"We're definitely on a roll. Last year I thought we hit the peak and we would never have a better return, but this year we outperformed our benchmarks by 5.8 percent," Meyers said.

Meyers said his long-range goals are more modest. Over a five-year period he hopes to beat the benchmark by 1 percent and the average fund by about 2 percent per year.

Factoring in this year's numbers brings HMC's five-year returns to 18.9 percent on average, 3.2 percent above the benchmark and 4.9 percent above the average fund.

Harvard's endowment and HMC's returns rose on the wave of the bull market. From June '96 to June '97 (Harvard's fiscal year), the Standard & Poor's 500-a measure of domestic equity performance-rose 34.7 percent.

"Corporate profits have grown and inflation has diminished over the past several years," Meyer said. "That's good for the markets."

For the same period, other large, diversified funds returned 20.3 percent on average, according to the Trust Universe Comparison Service, a compendium of 85 funds that manage more than $1 billion.

Investors at other firms agreed that Harvard's performance was outstanding.

"All that said, 25.8 percent is certainly a handsome return and a return I'm not sure we'll see in the future," said Tom Van Zant, a regional vice president for the Westport, Conn., based Common Fund, a cooperative that manages the pooled endowments of several hundred colleges, universities and independent schools.

Van Zant warns, though, that a comprehensive analysis of HMC's performance would factor in how each investment group performed.

The largest portion of Harvard's endowment, 36 percent, is invested in domestic equities. HMC's domestic equity investments outperformed even the S&P 500, returning 39.4 percent.

Though Harvard's overall return is down 0.2 percent from last year, returns on domestic equities were up 4.9 percent.

HMC's performance in recent years has been stellar, but the organization has not always performed so well.

During the mid- to late-'80s, HMC's returns were mediocre to dismal. In 1991 and 1992, Harvard's endowment grew more slowly than the large majority of college and university funds.

The S&P 500 outperformed Harvard's overall return this year, which is not atypical. But Meyer said this is a consequence of a well-balanced portfolio.

"If we were smart enough to know beforehand that domestic stocks are going to outperform all other areas, we would put all our money into that area, but no one's that smart," he said.

While official figures will not be available until the spring, the performance of the past two years suggests hefty increases in salary are forthcoming for at least some of the investors, as compensation for fund managers is based in large part on performance relative to predetermined benchmarks. Last year, the top manager made $4.7 million.

But University officials think HMC's investors earn their keep.

"These guys are really pros," said Elizabeth C. Huidekoper, vice president of finance. "They add real dollar value to the endowment."

COMPARISON WITH OTHER SCHOOLSIN BILLIONS  1996  1997  GROWTHPRINCETON  4.3  4.8  11.6% 1DARTMOUTH  1.1  1.3  18.2% 2YALE  4.9  5.7  16.3% 3HARVARD  8.6  10.8  25.8

Van Zant warns, though, that a comprehensive analysis of HMC's performance would factor in how each investment group performed.

The largest portion of Harvard's endowment, 36 percent, is invested in domestic equities. HMC's domestic equity investments outperformed even the S&P 500, returning 39.4 percent.

Though Harvard's overall return is down 0.2 percent from last year, returns on domestic equities were up 4.9 percent.

HMC's performance in recent years has been stellar, but the organization has not always performed so well.

During the mid- to late-'80s, HMC's returns were mediocre to dismal. In 1991 and 1992, Harvard's endowment grew more slowly than the large majority of college and university funds.

The S&P 500 outperformed Harvard's overall return this year, which is not atypical. But Meyer said this is a consequence of a well-balanced portfolio.

"If we were smart enough to know beforehand that domestic stocks are going to outperform all other areas, we would put all our money into that area, but no one's that smart," he said.

While official figures will not be available until the spring, the performance of the past two years suggests hefty increases in salary are forthcoming for at least some of the investors, as compensation for fund managers is based in large part on performance relative to predetermined benchmarks. Last year, the top manager made $4.7 million.

But University officials think HMC's investors earn their keep.

"These guys are really pros," said Elizabeth C. Huidekoper, vice president of finance. "They add real dollar value to the endowment."

COMPARISON WITH OTHER SCHOOLSIN BILLIONS  1996  1997  GROWTHPRINCETON  4.3  4.8  11.6% 1DARTMOUTH  1.1  1.3  18.2% 2YALE  4.9  5.7  16.3% 3HARVARD  8.6  10.8  25.8