Harvard fund soars 21.1 percent

The Harvard University endowment yesterday reported a 21.1 percent gain on its investments for fiscal 2004, marking its best year since 2000. But the nation's largest university fund also issued a sober forecast that returns over the next decade will be dramatically lower than in the past 10 years.

The endowment's managers, at Harvard Management Co., said in their annual report yesterday that the $22.6 billion fund beat its targets in nine of 11 asset classes, including stocks, hedge funds, and stocks from emerging countries. The fund fared especially well in commodities and bonds, far outpacing its goals. In US bonds, for example, the fund posted a 9.2 percent gain, while its bond benchmark lost 3.4 percent.

In total, from July 1, 2003, to June 30, Harvard's endowment grew by $3.3 billion. Of that, $1 billion was the result of Harvard Management making smart investment calls, said the firm's chief executive, Jack R. Meyer, or actively shifting money to different parts of the market instead of simply sticking with the plan the group makes at the beginning of each year. The fund would have $12.2 billion less in it today, Meyer said, if Harvard had posted only median returns over the past decade.

That performance is how Harvard Management executives each year seek to justify some of the biggest paychecks in the investment business. The group's six highest-paid managers last year earned a combined $107.5 million, a figure that has drawn sharp criticism from some alumni groups. Meyer has said in the past that Harvard would pay far more if it hired outside firms to do the work the executives do; the managers' pay is linked to their performance.

Harvard's 21.1 percent gain was well ahead of the 17.1 percent median return for the 25 largest university endowments in the nation, according to the Trust Universe Comparison Service, as well as ahead of the Standard & Poor's index of 500 stocks, which produced a total return of 18.1 percent. In 2003, Harvard produced a 12.3 percent return.

"It's a great year," Meyer said. "The absolute returns are good, and relative to our peers, we did very well."

John S. Griswold, executive director at the Commonfund Institute, a Wilton, Conn., firm that advises foundations and endowments, said large-endowment returns are coming in in the high teens for last year. Harvard's gain is the highest he's seen from any university so far this reporting season, Griswold said.

In the past year, Harvard notched a 22.8 percent gain on US equities, beating its 21.5 percent target by a relatively slim margin. It's a gap that has narrowed over the years. Over the past five years, which include the turbulent 2000-03 period, Harvard has gained an annualized 3.9 percent on US equities, compared to a 0.4 percent gain for its benchmark. In 10 years, Harvard's equity gain has been an annualized 17.8 percent, compared with 12.7 percent for the benchmark.

"It's tough to add value," Meyer said. While Harvard has expected average annual gains of 12 percent over the past decade, he said, he expects the target rate to be one-third lower, or 8 percent, in the years to come.

"It is sobering. I just don't think it's going to persist," Meyer said. "We really don't expect a 12 percent return in a 2 percent inflationary environment."

Len Rosenthal, professor of finance at Bentley College in Waltham, said he agrees that returns are going to decline for all investors. "After the great bull market, and even including the three down years of 2000 to 2002, the returns going forward have to come down." An 8 percent return, given rising interest rates, he said, "is very competitive."

Last year, Jeffrey B. Larson, a top performer who oversaw foreign equities, left the Harvard spotlight to start a firm with another Harvard Management colleague, Stuart Porter. Larson earned $17.3 million at Harvard in 2003, after overseeing average annual gains of 11.6 percent in his portfolio over five years, compared with a 4.1 percent annual loss for his benchmark. In 2004, Harvard gained 36.1 percent on foreign equities, compared to a 34 percent target.

Porter, who ran Harvard's commodities portfolio, posted a 19.7 percent gain in 2004, trouncing a 12.9 percent target. Harvard has commited $500 million to the hedge fund at Porter and Larson's new firm, called Sowood Capital; it plans to invest $200 million in the commodity fund.

Beth Healy can be reached at bhealy@globe.com.