Harvard endowment posts strong positive return

Harvard University’s endowment earned a 23.0 percent return during the fiscal year ending June 30, 2007. With FY07 being one of the best performance years since the inception of Harvard Management Company in 1974, the overall value of the University’s endowment grew to $34.9 billion.

The continued strong returns reinforce the endowment’s critical support for Harvard’s academic programs and mission. In the 2007 fiscal year, distributions from the endowment financed almost one-third of Harvard’s operating budget, or over $1.1 billion.

Harvard’s reliance on support from its endowment has increased in recent years. In fiscal 1997, endowment income provided 21 percent of Harvard’s total income; in the 2007 fiscal year, that figure was 33 percent. In dollar terms, the distributions from the endowment have tripled in this 10-year period.

The distributions from the endowment fund 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 2007, for example, scholarships and awards to students from University funds increased by over 94 percent, to $302 million from $156 million. Endowment dollars distributed for overall Harvard programs rose more than 70 percent during the same period, from $615 million to $1.04 billion.

Mohamed A. El-Erian, the President and CEO of Harvard Management Company (HMC), noted that “the dedicated hard work of my HMC colleagues was again critical in meeting the institution’s goal of preserving and enhancing the real value of the University’s endowment, thereby helping 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 “during a period of organizational transition, the strong investment performance was accompanied by important institutional gains, including the completion of the effort to rebuild HMC’s portfolio management platform.”

In addition to significantly outpacing the University’s total return target, HMC significantly out-performed its internal benchmark. Furthermore, the fiscal 2007 performance compares favorably to that recorded by other large investment management institutions. Specifically, the endowment’s return of 23.0 percent out-performed the median for the 151 large institutional funds as measured by the Trust Universe Comparison Service (17.7 percent), as well as the 20.9 percent that marks the top 5 percentile.

The 23.0 percent return for the last fiscal year brings the endowment’s annualized 10-year performance to 15.0 percent and the 5-year annualized return to 18.4 percent. Since its inception, HMC has averaged an annualized rate of return of 13.3 percent.

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 $29.2 billion on June 30, 2006.

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, which oversees 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.