Harvard University’s endowment declined 27.3 percent during the fiscal year ending June 30, 2009, one of the most challenging periods in modern times for financial markets.  The fiscal year return is expected to be largely in line with Harvard’s major university peers.  The overall value of the University’s endowment at the end of the fiscal year was $26.0 billion.

Despite the severe market correction experienced in the fiscal year, Harvard’s long-term performance remains strong.  The 5-year annualized return was 6.2 percent and the 10-year annualized return was 8.9 percent.  During the past 10 years, Harvard Management Company’s (HMC) active management has added approximately $18 billion of value over what the University would have earned by employing a simple 60/40 stock bond portfolio.

“During the 2009 fiscal year we saw extreme volatility and financial dysfunction impacting markets around the world as well as the Harvard portfolio,” said Harvard Management Company President and CEO Jane Mendillo.  “HMC actively managed the endowment through truly unprecedented conditions over the past year while maintaining the long-term focus on investment opportunities that has served Harvard so well historically.”

Mendillo added, “In navigating the past year’s storm, we developed greater financial flexibility, strengthened our investment team, sharpened our focus and positioned both HMC and the endowment to be robust, steady and, importantly, poised to benefit from growth in the world’s economies.  We have reset the building blocks for a solid, innovative and sustainable investment strategy.  We are confident that the portfolio is well positioned from both a risk and return standpoint to support the University and its operations into the future.”

In fiscal 2009, distributions from the endowment totaled $1.7 billion, contributing more than one-third of the University’s operating budget.

Harvard’s endowment helps the University undertake specific activities donors have endowed over time, including financial aid, faculty salaries and facilities maintenance. For example, endowment income supports Harvard’s student financial aid programs, which permit the University to admit qualified students regardless of their ability to pay.

Over the years, endowment returns have enabled the University to make substantial new investments in financial aid.  Despite the decline in the endowment, the University remains fully committed to its groundbreaking financial aid initiative.  Support for undergraduates is expected to increase by nearly 7 percent, as Harvard College awards more in financial aid as a result of the recent enhancements directed toward lower, middle, and upper-middle income students.  In addition, the College has eliminated loans, replacing them with grants, and estimates that it will spend $145 million on undergraduate financial aid this year.

Throughout the University, scholarships and awards to students from University funds have more than doubled from fiscal 2001 to fiscal 2009, reaching $388 million from $156 million.

During the 2009 fiscal year, when virtually every asset class behaved in ways that were highly correlated, certain investment strategies performed well.  HMC’s international fixed income team outperformed its benchmark by more than 900 basis points.  The internal emerging markets team outperformed its market by 370 basis points amidst a sharply negative and rapidly evolving market.  The natural resources portfolio was nearly flat in an environment of sharply negative returns for virtually all other growth assets.

“Active management was essential throughout this period,” added Mendillo.  “We worked decisively to make changes to our asset allocation and to increase our flexibility early in the fiscal year in response to rapidly changing marketing conditions.  The team then adjusted its focus to incorporate incremental market exposure and active investments within the portfolio over the last few months.”

The endowment is not a single fund, but more than 11,000 individual funds, many of which are restricted to specific uses such as support of a research center or the creation of a professorship in a specific subject.  The funds are invested by Harvard Management Company, which oversees the University’s endowment, pension, trust funds, and other investments using a combination of internal and external investment strategies at a total cost that is advantageous to the University relative to outside management.  The endowment’s total value is affected by several factors each year, including investment returns, new contributions and the annual payout for University programs.

Guidance Office: Answers From Harvard’s Dean, Part 1