Harvard endowment posted 27 percent loss
Harvard University's endowment lost 27.3 percent of its value in its most recent fiscal year, or nearly $11 billion, as tumultuous markets ate away at one of the school's main sources of funding and forced a number of cutbacks.
In a report issued today, Harvard Management said the school's endowment was down to $26 billion at June 30, compared to $37 billion the year earlier. As Harvard relies on the endowment for one-third of its annual budget, the losses forced it to slash expenses and lay off 275 people in June.
For the endowment, the losses were a stunning rebuke of investment strategies that in previous years had produced tremendous gains, and made the fund's managers the envy of the university endowment world. Now though, Harvard Management's new chief, Jane Mendillo, said she is adopting a number of changes, including hiring new investment managers and revamping how the fund looks for investment ideas.
Importantly one of those changes will include keeping hundreds of millions of in cash on hand to serve as a cushion and prevent, for example, the fund from having to unload assets at fire-sale prices to raise money, which only compounds losses. In her report Mendillo said that a factor in last year's poor performance was "a lack of ready liquidity in the portfolio to meet our obligations, along with the needs of the university."
Harvard University declined to say whether the endowment's cash crunch contributed directly to its urgent response to cut expense.
While saying it would be a mistake to back away from the fund's long-term strategy Mendillo said that one of the "lessons learned" by the firm was to bring its appetite for riskier investments more in line with Harvard's financial needs. Long term, the Harvard endowment is still well ahead of similarly sized funds. It's gained an average 6.2 percent annually for the past five years, compared with 2.5 percent for similar funds tracked by Wilshire Associates, a consulting firm. And over 10 years, Harvard is up 8.9 percent annually, despite last year's huge loss, compared to an average 3.2 percent annual gain for other funds.
Two things went very badly last year. First, the big mix of assets that Harvard has used -- from hedge funds and private equity to commodities and natural resources -- failed to protect the endowment from the plunging markets. As Mendillo acknowledged in the report, with few exceptions, "nearly every asset class did poorly." Indeed had the fund last year simply split its investments in a conventional mix of 60 percent stocks and 40 percent bonds, it would have lost only half as much money.
A second contributor was the fund's historically small, even negative cash position, which backfired amid the chaos. Harvard went into 2009 with a negative 3 percent cash in its portfolio, meaning it was borrowing money to squeeze extra returns out of its investments. (In prior years, the cash position was even lower, at negative 5 percent.) Mendillo has shifted that dramatically, to keep 2 percent of the fund, or more than $500 million, in cash.