Endowment Swells to $34.9B

Harvard’s endowment ballooned from $29.2 billion to $34.9 billion in the most recent fiscal year, marking one of the most successful years of investment since 1974, the University announced Tuesday.

The endowment's 23-percent gain was fueled largely by rapid growth in emerging markets, private equity, and real estate, according to Mohamed A. El-Erian, the president and CEO of Harvard Management Company, the University’s investment arm.

"The strong returns reflected both favorable markets and the expertise of our portfolio managers," El-Erian said in a telephone interview.

El-Erian, in his second year as HMC chief, came to Harvard after the departure of former CEO Jack R. Meyer, who took nearly one-third of HMC's employees with him to start a new hedge fund.

El-Erian said that he has worked to rebuild the internal portfolio management team so that it now covers five distinct areas. HMC has hired managers from the industry to head these teams, restructured its group of external managers, and improved its risk-analysis capability, El-Erian said.

El-Erian said that the changes he has enacted appear to have been effective in establishing stability for the largest university endowment in the world.

"It's not just what expertise you have but what opportunities the market gives you," he said. "We had a couple of years when we had lost a lot of talent, and now we're back to an equilibrium. The transition is complete."

Distributions from the endowment to the University's operating budget hit a record-setting $1 billion in the 2007 fiscal year, according to a University press release.

Last month, the University lost $350 million when Sowood Capital, a hedge fund started in 2004 by former HMC manager Jeffrey B. Larson, reported huge losses. Harvard had initially invested at least $500 million with the fund, but the most recent figures do not factor in some of the downfalls.

The loss represented a 1 percent decrease for the endowment, based on Tuesday's figures. But even with a downturn in the market in July, when the Standard & Poor's 500 index fell by 3.1 percent, El-Erian said that the endowment showed a monthly gain of .4 percent largely because of the new risk management strategies in place.

In addition to improving risk strategies to counter market uncertainties, HMC will launch a Web site next month and publish an annual report beginning next year, unprecedented moves for the historically secretive group.

Given continued worries in the credit market, El-Erian warned in his annual letter to Harvard affiliates that the high returns from the past year should be viewed as including some "windfall gain" as opposed to indicating a future trend of equal performance.

"It's one thing to have a good year, but it's also important to build the foundation for continued long-term institutional excellence," El-Erian said. "Most of the work here is not something that outsiders see, but at the end it really matters for maintaining Harvard’s critical role in education."

—Staff writer Nathan C. Strauss can be reached at strauss@fas.harvard.edu.