Harvard fund posts good but not great year

There were big changes in the past year at the Harvard University investment arm that manages the largest higher-education endowment in the world. Nothing changed when it came to Harvard's long record of beating the market.

Harvard Management Co., which invests the university's $29.2 billion endowment, reported yesterday that it earned 16.7 percent on its portfolio during the fiscal year that ended June 30. Big gains in commodities and foreign stocks were among the endowment's investment highlights.

Those returns outdistanced most investment benchmarks, but will probably fall short of the top tier of performers among leading university endowments. Harvard Management officials said they expect the 16.7 percent gain will be modestly above the average performance of those endowments, but not rank among the best 25 percent.

Harvard's endowment, which grew by $3.3 billion, outperformed the 10.8 percent median advance of other large institutional funds and a gain of 8.6 percent by the Standard & Poor's 500 index during the same period. Another investment benchmark designed to more closely match Harvard's endowment portfolio was up by 13 percent.

Harvard's investment performance took place during a period of dramatic management change. Longtime chief executive Jack Meyer left last September to form his own hedge fund, Convexity Capital Management , taking two star bond managers and about 30 other employees with him.

Harvard Management's new chief executive, Mohamed El-Erian , arrived in February and has been rebuilding an investment team since.

The departure of Meyer, and those of several other Harvard Management stars before his, followed concerns voiced by some alumni over the multimillion-dollar salaries earned by some of the endowment's best-performing money managers. All of them, including Meyer, formed their own investment firms and have been given chunks of Harvard's endowment to manage independently.

El-Erian said yesterday that the Harvard endowment's gain over the latest fiscal year was ``a solid performance that meets the university's objective."

Endowment income is important to universities like Harvard because they generate income that pays or defrays the cost of expenses like faculty salaries, student financial aid, and facilities maintenance. Harvard's annual endowment income has grown by 50 percent over the past five years, to $933 million, now covering nearly a third of the university's operating budget. The endowment itself has grown about 60 percent, from $18.3 billion, over the same five years.

Over the past decade, Harvard Management has earned an average of 15.2 percent annually, compared with an 8.7 median gain among large institutional funds. Harvard's performance owed a great deal to big gains in a variety of assets beyond US stocks and bonds, a trend that continued in the past fiscal year.

Harvard Management said its most recent annual performance included gains of 37.8 percent in emerging market stocks, 26.7 percent in commodities, 26.5 percent in more developed foreign stock markets, and 22.7 percent in real estate. It earned 22.7 percent in private equity investments and 15 percent in hedge funds categorized as ``absolute return and special situations."

Fixed-income investments produced the weakest returns. Harvard's portfolios of US bonds and inflation-indexed bonds lost money during the year.

Harvard's endowment has invested about 20 percent of its money in bonds, more than most leading university funds. That bigger slice of the overall investment pie hurt Harvard's returns, compared with other endowments, in a year when bonds performed poorly, El-Erian said.

Another factor that hampered Harvard's performance, compared with other school endowments, was related to the management changes of the past year. Billions that had been overseen by money managers who left Harvard Management last year have been temporarily placed in passive index investments. Nearly 30 percent of Harvard's endowment was still in passive investments on June 30.

Over the summer, Harvard Management made changes for the first time in five years to its ``policy portfolio," an asset-allocation plan that dictates roughly how much of the endowment is placed in different kinds of investments.

The allocation for fixed-income assets was cut from 21 percent to 13 percent, and US stocks were reduced from 15 percent to 12 percent of the portfolio. The allocation for emerging-market stocks was increased from 5 percent to 8 percent, and the ``absolute return" hedge fund category grew from 12 percent to 17 percent. Real assets, which includes commodities and real estate, among other things, is the largest investment category and commands 31 cents of each Harvard endowment dollar.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.