The toll on Harvard: $8.1b

Endowment's returns over 4 months just a bit better than S&P 500's

''Severe turmoil in the world's financial markets'' has hurt Harvard's legendary endowment - the world's largest - the university's president says. And the damage could grow. (Michael Robinson-Chavez/The Boston Globe/File 1997)

Even the famous Harvard University endowment can't beat this historically ugly market.

Harvard had just one-third of its assets in stocks last summer, yet the fund still lost 22 percent of its value, or $8.1 billion, in four months from July through October, the school's president told deans in a letter Tuesday. It was by far the largest loss ever for the world's biggest endowment - a huge reversal of fortune at a school known for its investment superstars.

And the damage isn't over yet. Total losses this fiscal year could reach 30 percent, according to the letter, written by Harvard president Drew G. Faust and executive vice president Edward C. Forst. The recent losses have come amid the worst market plunge since the Great Depression, spurring a cash crunch at Harvard and warnings of cost cuts across the university.

Calling the decline "sobering," Faust wrote that "the severe turmoil in the world's financial markets has affected all major asset classes in which the endowment is invested."

The endowment provides an unusually large share of the university's operating budget - about 35 percent, or $1.6 billion last school year. Most large private schools rely on endowments for just 15 percent of their budgets.

Harvard's investment plan for the current year did not look anything like a typical individual's 401(k) account. Only 11 percent of the portfolio was dedicated to US stocks on June 30, the last time the fund issued a public report. The other 22 percent of the equity slice was split evenly between stocks of developed countries and riskier emerging markets.

Hedge funds made up the biggest category for the endowment this year, accounting for about 18 percent of all assets. Private equity, or funds that invest in private companies, made up 13 percent of the portfolio.

Harvard also makes big investments in commodities, timber, agricultural land, and other real estate. Together, those types of investments were slated to get about 26 percent of the endowment money.

But for all its diversity, Harvard's portfolio hasn't fared much better this year than if it had just invested in the Standard & Poor's 500 Index. The index fell 24.3 percent from June 30 to Oct. 31. The Dow Jones Industrial Average was down 17.8 percent in that time. With its 22 percent decline, first reported by Harvard Magazine and the Harvard Crimson, Harvard's endowment had fallen to about $28.8 billion by Oct. 31, down from $36.9 billion on June 30. And the losses surely widened in November, along with the market's.

Harvard's endowment has lost money only four times before. The worst prior hit was 12.2 percent in 1974. Even amid the dot-com crash, the fund lost less than 1 percent.

In a September interview, the man who ran Harvard Management Co. for the first six months of 2008, Robert S. Kaplan, said Harvard's managers were not especially worried about problems roiling the credit markets at that time. But Kaplan cautioned that if all the world's economies were to suffer at once, no amount of diversification would help Harvard, or any other investor.

He was right. The average endowment will lose an estimated 25 to 30 percent this year, said John S. Griswold Jr., an executive director at Commonfund, a Wilton, Conn., firm that manages money and surveys endowments across the country on their investment returns. These massive losses are putting unprecedented pressures on colleges and universities, he said.

"With returns so poor, declines so heavy - October was really awful - you obviously have to make some moves in terms of rebalancing if you can," he said. "Part of the problem is liquidity."

Indeed, Harvard is reportedly considering selling as much as $1.5 billion in private equity holdings on the secondary market. That's a measure investors resort to only in the worst of times, because such investments sell at steep discounts. But the endowment may take this step, said two people briefed on the fund's standing, to avoid the cash calls the private equity firms may make in coming months.

In addition, because the fund's other assets have declined in value, Harvard's managers quite likely need to cut back the private equity stake to stay within their target allocation.

Harvard has a large portion of its funds in portfolios that are illiquid, or which cannot easily be sold, the way stocks can. At the end of June, the endowment had 29 percent of its money in hedge funds and private equity.

Harvard spokesman John Longbrake said there was no cash shortage at the endowment.

It was extraordinary, however, for Harvard to announce the returns of its endowment mid-year. According to one person briefed on the situation, the school's chiefs were looking to head off rumors of even deeper losses.

In a statement, Longbrake said, "The president thought that it was critical that the university-wide efforts to plan responsibly be informed by a more widely shared understanding of what is currently expected."

Beth Healy can be reached at bhealy@globe.com; Steven Syre at syre@globe.com. Tracy Jan, Andrew Ryan, and Peter Schworm of the Globe staff contributed to this report.