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Harvard endowment has 7-year best, hits $34.9b

Harvard University's endowment grew to $34.9 billion thanks to investment returns of 23 percent in the fiscal year ended June 30, its best performance in seven years, the university said yesterday.

The world's largest university endowment increased from $29.2 billion the previous year and distributed $1.1 billion to Harvard to spend on teaching, research, and student aid. It was the first time the endowment distributed more than $1 billion in a year to the university.

The growth of Harvard's endowment in a single year, $5.7 billion, dwarfs similar gains in the academic world. Other than Harvard, only six American universities held entire endowments larger than $5.7 billion at the end of the previous fiscal year, according to the National Association of College and University Business Officers.

Harvard's fiscal-year investment performance was its best since the endowment earned 32.2 percent in 2000. Harvard Management Co., the university's investment arm, manages the endowment but also uses outside firms to invest some money.

In its annual letter to the university, Harvard Management also said huge losses at the Boston hedge fund Sowood Capital Management had inflicted a decline of about 1 percent in the endowment in July, after the close of the 2007 fiscal year.

Harvard was the initial backer and among the largest investors in Sowood, which was run by former Harvard Management portfolio manager Jeffrey Larson.

But Harvard Management said other investments in the endowment, hedging against events that hurt Sowood, balanced the decline. It said the endowment gained about 0.4 percent in July, while the Standard & Poor's 500 index lost 3.1 percent.

The endowment's 23 percent investment gain for all of fiscal 2007 exceeded the 20.6 percent gain of the S&P 500 over the same period and an advance of 17.2 percent by a benchmark designed to match the way Harvard allocates money to different kinds of investments.

The Trust Universe Comparison Service, with current data on 151 institutional investors, such as pension funds, reports a median return of 17.7 percent for the June 30 fiscal year. The top 5 percent of performers in that group earned 20.9 percent.

But most other university endowments have yet to post their annual reports.

Some of those endowments investing with greater emphasis on certain asset categories such as real estate and private equity may exceed Harvard's total return for 2007.

Harvard Management Co. said the endowment's performance in its latest fiscal year was driven mostly by its investments in emerging markets, international stocks, and US equities. Its emerging markets portfolio, the best single performer, surged 44 percent.

Harvard's asset-allocation targets have been adjusted only slightly for the new year. About 45 percent of the endowment's money is targeted for stocks but only 9 percent is allocated for fixed income investments. So-called "real assets," including commodities, real estate, and inflation-indexed bonds, account for a third of the pie, and special situation or "absolute return" funds are allocated another 18 percent. Harvard borrows an amount equal to about 5 percent of its assets to make all those investments.

The 2007 fiscal year was Harvard Management's first full year under its president, Mohamed El-Erian, who joined the university's investment arm early in 2006. He succeeded former president Jack Meyer, who left to start his own hedge fund and took many of Harvard Management's best-known and highest paid portfolio managers with him.

Meyer and his managers had become controversial in some Harvard circles because a compensation system designed to reward superior performance was paying a few people as much as $18 million a year. Several highly paid portfolio managers left to run their own firms, including Larson, and counted the university as their first clients before Meyer and Harvard Management's key bond managers resigned.

When he arrived, El-Erian said he would not abolish Harvard Management's performance-oriented compensation plan, but top salaries for the 2006 fiscal year paled in comparison to earlier periods. A report on the highest paid managers for the 2007 fiscal year will be issued near the end of the year.

Steven Syre can be reached at syre@globe.com.

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