European losses offset investment gains

By Beth Healy Globe Staff September 26, 2012

Harvard Universitys endowment was essentially flat in its fiscal year ended June 30, as steep declines in European and emerging markets wiped out gains in other areas.

The nations largest college endowment slipped 0.05 percent, or $16 million, according to its annual report, released Wednesday.

Without investment profits coming in, total assets shrank by $1.1 billion. It ended the year with $30.7 billion in assets, still down from its high of $36.9 billion before the financial crisis.

Jane L. Mendillo, chief executive of Harvard Management Co. which oversees the endowment, said she was pleased that the endowment held steady and was able to provide substantial support to the university, even amid sliding global equities and losses from hedge funds and commodities. The fund delivered more than one-third of Harvards annual operating budget.

The endowments slight decline was on par with that of the $50 billion Massachusetts state pension fund, which invests in a comparable mix of stocks, bonds, and alternatives, like timber and private equity.

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The Standard & Poors 500 stock index gained 5.5 percent during the same 12-month period.

Harvards major rivals, including Yale and Stanford universities, are expected to release their endowment returns in the coming days.

This was Mendillos fourth year in one of the most widely watched investment jobs in the nation. She arrived just before the financial crisis and was in charge for a staggering 27 percent dive for the year ended June 30, 2009. Since then, she has focused on risk management and repositioning the portfolio so that it is more conservative and able to cash out of investments when necessary.

In her annual letter, Mendillo said, Our company and our portfolio have stabilized and strengthened from their postfinancial crisis state. She noted that the funds risk profile had improved, including good progress rebalancing liquid and illiquid assets, although we are not quite where we want to be yet.

Under Mendillo, the endowment has cut the amount of money pledged to private equity and real estate funds from $11 billion to $4.5 billion. Mendillo remains interested in freeing up more cash to deploy in other investments.

For years, Harvards endowment produced eye-popping returns and was positioned aggressively even borrowing money to leverage the gains to make the most of rising markets. But when virtually every global market collapsed in late 2008, Harvard suffered along with other large endowments.

David Kaiser, a member of a group of Harvard alumni from the class of 1969 who are critics of high pay for Harvard investment managers, said he was encouraged by the endowments recent results.

The returns suggest that Harvard Management has indeed adopted far more conservative strategies, which is welcome. I am also pleased to see that Harvards fortunes are still moving in tandem with those of ordinary Americans and ordinary people around the world, he said in an e-mail. Meanwhile, Im sure my classmates and I will be interested to see how the compensation of senior executives at Harvard Management is affected.

Mendillos three-year record is now a 10.4 percent average annual return, beating Harvard Managements internal benchmark for that period of 9.2 percent. Had the money been invested in a simple mix of 60 percent stocks and 40 percent bonds, it would have gained 12.8 percent a year for the past three years.

Mendillo remains convinced that, long term, the endowment needs a more complex mix of assets than that. But the diversified approach does not always pan out in a single years results. In Harvards latest fiscal year, for instance, US equities rose 9.7 percent, but foreign stocks fell 10.8 percent and emerging markets equities tumbled 17.4 percent. Overall, that brought Harvards total stock results down to a 6.7 percent loss.

Still, Mendillo wrote, We remain convinced that active investing in emerging and international markets is not only wise, but imperative over the long term.

She has also overhauled the endowments approach to real estate investments and said the strategy was starting to pay off. Instead of relying on real estate funds run by third-party managers, its now investing directly and through joint ventures in properties. The return on investment was one of the endowments strongest performers of the year, at 15 percent, she wrote. And the total real estate portfolio was up 8 percent.

Beth Healy can be reached at bhealy@globe.com .