Endowment Drop Is First in 17 Years

Harvard’s massive endowment slipped in the last fiscal year for the first time in 17 years, down to just over $18 billion.

The news—part of an annual update released by the Harvard Management Company (HMC)—came as a sharp departure from recent years, during which Harvard’s investments have yielded double-digit returns.

Last year, for example, the endowment surged $4.4 billion to $19.2 billion—a 30 percent leap. This year, the endowment dropped to $18.3 billion.

This year's end“As we cautioned in last year’s letter, we didn’t think the double-digit positive returns would persist forever,” HMC President Jack E. Meyer said in an interview yesterday. “Nonetheless, I’m disappointed to finish the year in negative numbers.”

Until this year, Harvard’s investments hadn’t lost money since 1984. The newly released numbers show a 2.7 percent decrease in the investments during FY01—slightly over $500 million.

The rest of the decrease is attributable to increased spending from the endowment. In 1991, spending out of the endowment kept it level despite successful investments.

Harvard’s announcement comes a day after Yale’s. The University’s Ivy League rival, which has the country’s second-largest university endowment, announced that its $10.1 billion endowment increased 9.2 percent overall during FY01, minus $300 million in additional spending, bringing their endowment to $10.7 billion.

Meyer, who stays in close contact with his Yale counterpart, Yale Management Company President David Swenson, said that Harvard and Yale have had similar returns in recent years, although Yale’s higher valuation of lucrative private equities and more successful absolute returns last year helped them show an overall increase.

“Yale certainly outperformed us last year,” Meyer said.

Yale officials did not return calls for comment yesterday.

While Harvard’s investments lost about $500 million and the University spent about $600 million, the University added about $300 million to the endowment in new gifts, yielding the adjusted total of about $18.3 billion as of June 30, the end of the fiscal year. (Numbers do not add up precisely because they are rounded.)

Harvard’s results are slightly above average compared to other institutional investors. Duke University announced earlier this month that its endowment had slipped about six percent.

While Harvard’s overall return was negative, Meyer said that the endowment’s managers still surpassed their annual targets. While the S&P 500 Index lost 10.9 percent last year, HMC’s domestic equities only lost only 4.6 percent.

In the 11 different equity areas that HMC breaks down, HMC only fell behind the benchmarks in three areas: private equities, real estate and inflation-indexed bonds. HMC measures its performance based on a ideal “Policy Portfolio” that directors established in 1991 as an appropriate diversification of risk.

In recent years, Harvard’s endowment has averaged a 16.9 percent return and outperformed the standard institutional investor, as measured by the Trust Universe Comparison Service, by 5.9 percent annually. That 16.9 percent return over five years has translated into $10.5 billion in endowment income.

The endowment figures were originally scheduled to be released after HMC’s board meeting Sept. 13, but University President Lawrence H. Summers asked at that meeting that the numbers be delayed in respect to the victims of Sept. 11’s terrorist attacks.

The attacks also affected meeting attendance, with roughly half of the company’s directors forced to participate by conference call after all airlines in the U.S. were grounded.

Meyer said yesterday that he is not concerned about the precipitous sell-off in the markets since they reopened after the attacks last week.

Since June 30, the endowment is a little bit ahead of HMC’s benchmarks for fiscal year 2002, he said. He declined to provide more specifics.

“It’s been a difficult start to the year,” he said.

—Staff writer Garrett M. Graff can be reached at ggraff@fas.harvard.edu.