Harvard and Yale Report Losses in Endowments (original) (raw)

Sept. 10, 2009

Harvard and Yale disclosed on Thursday just how many billions their endowments had lost in the last year, signaling yet more belt-tightening at the nation’s wealthiest schools.

Harvard’s endowment tumbled 27.3 percent in its latest fiscal year, largely because of problems with its private equity and hedge fund portfolios, lopping off 10billionandshrinkingitsportfolioto10 billion and shrinking its portfolio to 10billionandshrinkingitsportfolioto26 billion. Taking into consideration donations and spending, the endowment shrank by nearly 30 percent.

Yale also suffered about a 30 percent loss in its endowment, to about $16 billion, the university’s president disclosed in a letter Thursday, adding that final figures on performance were still being compiled.

“We want to alert you to the fact that another round of reductions will be necessary,” Yale’s president, Richard C. Levin, wrote in what he called a budget update to the Yale community praising the cost-cutting that had already occurred.

A year earlier, Harvard’s endowment had approached 37billion,whileYale’sendowmenthadbeen37 billion, while Yale’s endowment had been 37billion,whileYale’sendowmenthadbeen23 billion.

At Harvard, the loss is the biggest percentage decline in 40 years and has prompted a review of how it manages its money and allocates assets. Jane Mendillo, who inherited a long-term portfolio when she took over the school’s endowment on July 1, 2008, intends to manage more of the school’s assets directly instead of using outside money managers and to hire additional people to oversee the management by outsiders.

In her letter describing the dismal results for the year ended June 30, Ms. Mendillo said she was adding a chief operating officer as part of this initiative.

Although other endowments at major universities suffered declines, many did better than Harvard and Yale, which have been known over the years for their investing prowess. The University of Pennsylvania, for example, was down 15.7 percent. A survey of foundations and endowments with assets of more than $1 billion by Wilshire Trust Universe Comparison Service found an average decline of 17 percent in fiscal 2009.

While Harvard aims to outperform, it also establishes a policy portfolio with a benchmark index for each asset class. Weighting its assets in each category and using those benchmarks, Harvard underperformed its policy portfolio by 2.1 percent.

Of six investment classes, four failed to meet their benchmarks. In a couple of cases the shortfall was sharp. Harvard’s private equity investments declined by 31.6 percent, compared with a benchmark loss of 23.9 percent. Absolute returns, more generally called hedge funds, fell 18.6 percent, compared with a 13.2 percent decline for the index. Harvard’s public equities did marginally better than the market, as did its real assets.

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Jane Mendillo, manager of Harvard’s portfolio since July 2008.Credit...Jodi Hilton for The New York Times

Yale said that the publicly traded portion of its portfolio did not decline further from December through June, but that the illiquid portions in private equity and real estate continued to sag.

Harvard had a large share of assets in private equity, about 13 percent of its total as recently as February.

In good times these private funds return money as deals are completed. In the recent financial upheaval, not only did the returns dry up but the funds required investors like Harvard to meet their commitments to add new money, creating a cash squeeze.

Bringing more assets under internal management is intended to give the Harvard endowment more control and increase transparency. The endowment aims to increase its cash position and to reduce its allocation to private equity and other funds that lock up money for significant periods of time.

But adding highly paid money managers may also prompt questions about how much compensation is appropriate, a sticky subject for the endowment in years past.

Although many of Harvard’s investments predate her arrival, Ms. Mendillo will be under pressure to turn things around quickly. The university has curtailed a planned expansion and made numerous other cutbacks because of its financial decline.

Harvard had been relying on the endowment for roughly one-third of its annual budget, and now plans to reduce that portion somewhat.

The Yale endowment is led by David F. Swensen, who has advocated aggressive use of alterative investments like private equity and hedge funds. At the end of fiscal 2008, Yale continued to turn in the best 10-year performance with an average annualized gain of 16.3 percent, which was followed by Harvard with 13.8 percent.

Harvard’s 10-year average annualized return has now fallen to 8.9 percent. That remains well above its policy portfolio of 4.5 percent.

One issue that may stir interest amid cutbacks on campus is whether Ms. Mendillo, or any Harvard managers whose investments did well, receives a bonus. There has been conflict over the years about whether Harvard’s endowment should pay its managers the kind of bonuses that are typical of Wall Street.

Seeming to anticipate this, Ms. Mendillo took pains in her letter to explain the endowment’s compensation philosophy, noting that a manager’s compensation was determined by measuring performance against a benchmark in a way that aligned his or her interest with that of the university The school also has a clawback provision, which requires a manager to perform well over several years to justify a big bonus for a single year.

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