Harvard Endowment Hit by $1 Billion Natural Resources Writedown

(Bloomberg) -- Harvard University wrote down the value of its natural resources investments by $1.1 billion in the last fiscal year, contributing significantly to its poor endowment performance.

The university revalued the portfolio to $2.9 billion from $4 billion in the year through June 30, according to an annual report released Thursday. The writedown is part of an ambitious attempt to overhaul the $37.1 billion endowment and helps explain why the world’s richest school trailed in performance against its peers.

Fundraising remains a bright spot for the university. Gifts in the fiscal year totaled $1.3 billion, a record for Harvard after the $1.2 billion haul in the year-ago period.

Harvard Management Co., which oversees the endowment, has slashed employees, sold assets and cut internal hedge funds in order to reverse a decade of poor performance. In fiscal 2017 the fund gained 8.1 percent. The average increase for more than 450 endowments and foundations was 12.7 percent in the period, according to data by Cambridge Associates.

‘Ambitious’ Plan

Narv Narvekar, who previously led Columbia University’s endowment to solid long-term returns, took over as chief executive officer of Harvard Management in December. Narvekar is “implementing an ambitious and far-reaching plan to improve endowment returns, and prudent financial management has the university positioned to weather future uncertainties,” Harvard President Drew Faust wrote in the annual report.

The natural resources portfolio -- which primarily consists of timberland and agriculture holdings -- was once viewed as a top-performing asset while employees overseeing the investments were among the highest paid at the Boston-based management company. Most of those managers have departed in the past three years and the portfolio lost 10 percent in the year through June 30, 2016, the latest figures available.

Harvard sought to unload assets such as a eucalyptus plantation in Uruguay and a dairy farm in New Zealand this year as it reassessed the value of the portfolio, Bloomberg News previously reported.

Assets ‘Challenged’

Narvekar wrote in an investment report in September that “a few” natural resources assets “have significant challenges.” He said some valuation markdowns were taken prior to his arrival, “and we have taken more markdowns” in fiscal 2017.

“Markdowns do not imply sales,” Narvekar wrote. “HMC will choose to hold many of the assets if the prospects for forward-looking returns are reasonable.”

Real estate investments fell about $1 billion to $5.4 billion, according to the annual report. Harvard Management sold stakes in real estate funds in the secondary market, according to a person familiar with the matter. Harvard’s private equity portfolio rose slightly to $7.5 billion even though it unloaded buyout funds because it also made new investments, the person said.

Private Equity

In his investment report Narvekar said the endowment had strong returns in public equity, private equity, and direct real estate investments.

The most significant change came in the holding of bonds, which plummeted because the management company shut a number of internal hedge funds, including so-called relative value funds that try to profit from price differences between related securities, the person said. The value of domestic fixed-income holdings in this category fell more than $10 billion to $1.6 billion, according to the annual report.

In Thursday’s report, Harvard said it ended the fiscal year with a $114 million surplus, compared with $77 million in the prior period. Total operating revenue rose 5 percent to $5 billion. Net assets rose 4 percent to $44.1 billion.

In fiscal 2017, the endowment’s distribution increased 5 percent to $1.8 billion, according to the report. The payout rate -- what is paid annually for school operations -- was 5.4% in fiscal 2017.

--With assistance from Kate Smith

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

To contact the editors responsible for this story: Mary Romano at mromano6@bloomberg.net, Josh Friedman

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