In Tough Year, Endowment Falters

Harvard’s endowment slipped for the second year in a row but fared significantly better than market benchmarks during Fiscal Year 2002 (FY02), according to figures released yesterday.

The endowment dropped from $18.3 billion to just over $17.5 billion, hurt by a 0.5 percent decline in investment returns and an increase in endowment pay-outs, according to Jack E. Meyer, president of the Harvard Management Company (HMC), the group responsible for investing Harvard’s endowment.

This FY02 figure factors in a loss of $100 million in investments, $750 million in spending and $150 million in additional donations to the University.

In FY01, the return on investments fell 2.7 percent, causing a $500 million decrease from the endowment’s peak of $19.2 billion, which it hit in 2000.

“We may not be out of the woods, but the endowment has weathered the two-year storm in fine shape,” he wrote in the annual report.

Although the endowment has decreased over the past two years, its payout has increased in recent years, with endowment spending rising annually in the last decade. In FY97, pay-outs added up to only $328 million compared to last year’s total of more than twice that amount.

The University typically tries to pay out about 4 percent of the endowment annually, although the final percentage typically is about 3.5 percent.

University Treasurer D. Ronald Daniel could not be reached for comment yesterday.

The Returns

The figures that HMC released yesterday indicate that the endowment performed relatively well in a rough economic environment that has characterized recent years.

Meyer wrote in the annual report that Harvard’s ten-year performance has surpassed its peers and outperformed the market averages, or benchmarks, that HMC uses to judge the endowment’s performance.

“If Harvard had earned median returns over the past ten years (which is what one would expect from a large, diversified fund), Harvard would have $8 billion less than it actually has now,” he wrote.

Over the past two years, Harvard endowment returns have dropped 3.2 percent, while the S&P 500 has fallen 32 percent and the NASDAQ has declined 63 percent over the same time period.

In fact, in most asset classes during FY02, Harvard met or outperformed its benchmarks.

Emerging markets investments—which include Brazil, Mexico, Taiwan and China—increased 7.5 percent against a benchmark of 1.9 percent.

Investments in foreign bonds also performed well, returning 32.4 percent against a 15.6 percent benchmark, along with absolute returns, which increased 10.2 percent against a 4 percent benchmark decline.

Real estate was the only area in which Harvard performed lower than its benchmark, with a one percent decline against a benchmark increase of 4.8 percent.

Meyer said that the endowment will likely improve its real estate performance next year.

“In the June quarter of the fiscal year, we took harsh write downs on our own assets, and we expect assets in the benchmark to be written down in the next year,” Meyer said. “We don’t think the benchmark reflects the current market conditions, so I won’t be surprised if we catch up over the next year.”

The endowment’s performance relative to benchmarks—not its absolute returns—determines compensation of HMC investors.

With HMC investments returns dropping only 0.5 percent relative to benchmarks of a 4.5 percent drop, Meyer said it “makes a lot of sense” for HMC managers to receive bonuses in the down market.

The salaries of HMC’s top investors will be released later this fall.

Harvard, which also has the country’s largest endowment, is typically one of the first institutions to release its annual returns. Yale, whose endowment outperformed Harvard’s in FY01 rising to $10.7 billion, should release its FY02 figures in the next couple of weeks, according to the Yale News Office.

—Staff writer Jenifer L. Steinhardt can be reached at steinhar@fas.harvard.edu.