Harvard's Negative Return Part of Broader Trend, Experts Say

A negative return on an investment is likely to cause anxiety for investors concerned about the long-term viability of their assets. For this reason, Harvard’s announcement of a negative 0.05 return on its investments attracted media attention across the globe.

But experts on higher education finance downplayed Harvard’s negative returns and the about 4.1 percent decline in its endowment, contextualizing the performance as part of a broader trend in university endowments.

Returns on university endowments were comparatively low for fiscal year 2012 across the board. Yale University this year earned a 4.7 percent return on its investments and Princeton, 3.1 percent. Both universities, which are among the schools with the top five largest endowments, earned a 21.9 percent returns for fiscal year 2011.

Preliminary data indicates that 200 of the largest educational institutions reported an average negative 0.03 return this past year, according to John S. Griswold, executive director of Commonfund Institute.

“It indicates that there’s going to be a lot of disappointment. But, this is a challenging time for all investors,” he said. “We try to be crystal-ball gazers, but clearly it’s going to be a while before the markets settle down.”

This year Harvard’s endowment dipped for the first time since fiscal year 2009, falling about 4.1 percent to $30.7 billion. In the previous fiscal year Harvard’s endowment grew by 21.4 percent to $32 billion, and over the past 20 years Harvard’s annual endowment return has averaged 12.3 percent.

Experts said that the 2012 fiscal year’s lower returns are a consequence of a broader trend in investments.

“It’s the market. The economy has been uncertain and it’s just reflecting market returns,” said Lucie Lapovsky, who consults on higher education finances. “In any one year the return can be significantly negative and significantly positive. You have to be able to live with the ups and downs.”

While Harvard’s endowment yielded flat returns, experts said the success of Harvard Management Corporation’s investment strategy should be evaluated by assessing the endowment’s performance as compared to HMC’s predetermined benchmarks.

Overall, Harvard’s endowment beat HMC’s benchmark Policy Portfolio, a set of assets determined by the HMC board to best serve Harvard’s long-run financial needs, by about a percentage point.

Harvard’s endowment is broken into five asset classes: public equities, private equity, fixed income, absolute return, and real assets. Within those asset classes, the endowment outperformed the benchmark in all areas except private equity, where it fell 2.05 percent short.

Lawrence E. Golub ’80, who runs Golub Capital, a private equity and venture capital firm, described private equity as an asset class that is “hard to estimate.”

According to Golub, private equity underperformed the stock market and the bond market in fiscal year 2012.

Harvard’s endowment also has an unusually large stake in foreign equities, which fared far worse than many other asset classes this fiscal year. Of the broad asset classes, only public equities, which include foreign equities, posted negative returns for the 2012 fiscal year.

Returns from Harvard’s endowment—the largest of any educational institution around the world—funds 35 percent of the University’s operating budget. The payout structure of the endowment allows the University to continue to fund its operation in years with low returns.

Griswold noted that donors set many restrictions on the use of revenue from money they donate. While the University is likely to raise billions in its upcoming capital campaign, HMC’s leadership will not have free reign with those donations.

Despite the dip in the endowment and investment returns, confidence in HMC, headed up by President and CEO Jane L. Mendillo, remained high both inside or outside the University.

“In such volatile economic times, it’s important to note that results in any 12 month period can vary dramatically,” University Treasurer James F. Rothenberg ’68 said in the press release. “Jane and her team have done an excellent job strengthening Harvard’s portfolio and I’m confident the endowment is well positioned for the long-term.”

Griswold, who leads the NACUBO-Commonfund Study of Endowments, also praised Mendillo’s stewardship.

“Harvard’s managers are amongst the most capable of managers in this business and I think they’ll continue to [be] that,” he said.

—Staff writer Hana N. Rouse can be reached at hrouse@college.harvard.edu.

—Staff writer Justin C. Worland can be reached at jworland@college.harvard.edu.