Campus & Community

Harvard endowment reclaims some ground:

4 min read

Investments return 12.5 percent after two years of decline

Harvard University’s endowment last year made up ground lost during the prior two years’ difficult investment climate, earning a 12.5 percent return during the 2002-03 fiscal year, bringing the endowment’s overall value to $19.3 billion.

The increase raises the endowment’s overall value from $17.5 billion, where it stood at June 30, 2002, to just above the $19.1 billion total on June 30, 2000.

While returns on endowment investments rose 12.5 percent in the 2003 fiscal year, the endowment’s overall value is also affected by new contributions each year, as well as the annual payout for University programs. The University used about $770 million in endowment dollars to help finance the University’s $2.4 billion FY03 budget.

While the endowment’s overall value rose, purchasing power hasn’t recovered from the decline of recent years. After adjusting for spending and higher education price inflation, the endowment is still down roughly 11 percent relative to its fiscal year 2000 close, Harvard Management Company (HMC) President Jack Meyer said in his annual letter detailing endowment performance.

“The positive 12.5 percent return for fiscal 2003 was a welcome change from the negative returns for fiscal 2001 and 2002 but does not signal that we are out of the financial woods,” Meyer said.

Endowment income provides critical long-term financial stability for Harvard’s academic programs. Historically, between 4 percent and 5 percent of the endowment is spent annually on Harvard programs. That money provides for specific activities donors have endowed over time, including financial aid, faculty salaries, and facilities maintenance. Among other things, endowment income supports Harvard’s generous student financial aid programs, which permit the University to admit qualified students regardless of their ability to pay.

Annual endowment performance is not just measured by gains or losses in value, but also by how investments perform against benchmarks in different investment classes. The endowment beat benchmarks in eight of 11 asset classes, led by a 52.4 percent return in foreign bond investments and a 29.9 percent return in domestic bonds.

Overall, Harvard’s 12.5 percent return compares favorably with both the 8.3 percent return of the overall benchmark and the 4 percent return of the large median fund, measured by the Trust Universe Comparison Service.

Meyer said the endowment’s three-year performance validates Harvard Management Company’s emphasis on its managers bringing added value to their investments above relevant investment benchmarks. Over the last three years, the cumulative return on the endowment was 8.9 percent, while the S&P 500 lost 29.9 percent, and the median fund measured by the Trust Universe Comparison Service declined 6.3 percent.

“Experience teaches that a key to strong long-term investment performance lies in protecting assets during times of troubled markets. HMC was able to do this during a difficult three-year period,” Meyer said.

Five- and 10-year performance remained strong. Over the past five years, Harvard’s endowment has averaged a 10.1 percent return and outperformed the median institutional fund by 7.1 percent. Over 10 years, the endowment’s annualized performance is 14.7 percent, compared with 8.7 percent by the median fund. If Harvard’s endowment had grown at the rate earned by the median fund, Meyer said, it would be $9.6 billion less than it is now.

The endowment is not a single fund, but more than 9,400 individual funds, many of them 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 the Harvard Management Company, established in 1974 to oversee the University’s endowment, its pension and trust funds, and other investments.

Each school within the University uses a combination of income from investments, gifts from fundraising efforts, and tuition to cover the cost of educating students. Tuition from Harvard College, for instance, covers only about two-thirds of the total cost of a Harvard education. Harvard’s reliance on support from its endowment has increased in recent years. In 1992, endowment income provided 18.6 percent of Harvard’s total income. In the 2003 fiscal year, that figure was about 31 percent.