Harvard endowment posts solid positive return

Harvard University’s endowment earned a 16.7 percent return during the year ending June 30, 2006, bringing the endowment’s overall value to $29.2 billion.

The continued strong returns reinforce the endowment’s critical support for Harvard’s academic programs and mission. In the 2006 fiscal year, endowment dollars provided almost a third of Harvard’s operating budget, or over $930 million.

Distributions from the endowment pay for 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. From fiscal 2001 to fiscal 2006, for example, scholarships and awards to students from University funds increased by over 70 percent, to $269 million from $156 million. Endowment dollars distributed for overall Harvard programs rose more than 50 percent during the same period, from $615 million to $933 million.

Mohamed A. El-Erian, who was named Harvard Management Company president and CEO in October 2005 and took over in February 2006, noted that the Harvard Management Company (HMC), “was again able to meet the goal of preserving and enhancing the real value of the University’s endowment after taking into account annual distributions to fund a host of activities that are central to Harvard’s ability to maintain a leadership role across a wide range of educational endeavors.” He observed that, “notwithstanding some of the challenges associated with its current transition phase, HMC’s efforts at adding value continued to draw successfully on both internal and external expertise.”

In addition to significantly outpacing the University’s total return target, the fiscal 2006 performance compares favorably to other large institutions. Specifically, the endowment outperformed the median large institutional fund, measured by the Trust Universe Comparison Service (TUCS), by 5.9 percentage points (16.7 percent versus 10.8 percent). According to preliminary numbers, Harvard’s performance was also slightly above the median return of the 25 largest University endowments.

The 16.7 percent return for the last fiscal year brings the endowment’s annualized 10-year performance to 15.2 percent, beating the 8.7 percent turned in by the TUCS median large fund. The 5-year annualized return recorded by HMC is 13.5 percent, well ahead of the 6.7 percent registered by the TUCS median. In commenting on the drivers of return, El-Erian noted that, “increased internationalization in the context of a broadly diversified asset allocation was a decided positive.”

The endowment’s total value is affected by several factors each year, including investment returns, new contributions, and the annual payout for University programs. The endowment stood at $25.9 billion on June 30, 2005.

Annual endowment performance is not measured just by gains or losses in value, but also by how investments perform against benchmarks in different investment classes. In fiscal 2006, Harvard’s endowment beat benchmarks in 9 of 11 individual asset classes. Emerging markets posted the year’s highest total return while commodities achieved the best performance relative to benchmark. In aggregate, HMC out-performed its composite benchmark by 3.7 percentage points, translating into $0.9 billion of incremental value added for the endowment.

The endowment is not a single fund, but around 11,000 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 Harvard Management Company, established in 1974 to oversee the University’s endowment, pension, trust funds, and other investments at a cost less than outside management.

Harvard seeks to spend about 5 percent of the endowment annually on University programs. 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 fiscal 1996, endowment income provided 21 percent of Harvard’s total income; in the 2006 fiscal year, that figure was 31 percent.