Harvard's Endowment Size ‘No Excuse for Muted Returns,’ CEO Says

(Bloomberg) -- Harvard University’s endowment head said he rejects the idea that the $39.2 billion fund is too large to produce “attractive returns,” as his team works to revamp the portfolio.

“As peer endowments with similar assets under management have shown, the size of the endowment is no excuse for muted returns,” Narv Narvekar, chief executive officer of Harvard Management Co., wrote in the annual report published Thursday.

The fund’s 10 percent gain in fiscal 2018 lagged most of its Ivy League peers, including Princeton University’s $25.9 billion fund, which returned 14.2 percent, and Yale University’s $29.4 billion fund, which rose 12.3 percent. Harvard’s investments in private equity helped fuel the gains while natural resources holdings weighed it down.

In Transition

“While we are not pleased with this performance, we are mindful that ours is an organization and a portfolio in transition,” wrote Narvekar, who completed his first full year at the helm of the fund in fiscal 2018. He added that there are “certain parts of the portfolio that need work.”

Natural resources produced a 2 percent loss, the third consecutive year the once high-flying portfolio has tumbled. It was one of the smallest parts of the portfolio, at six percent of assets.

The annual report listed asset allocations at the start of the fiscal year on July 1, 2017 and performance by sector for the 12-month period. Harvard declined to provide the asset allocation breakdown for the end of the fiscal year.

Harvard's Endowment Size ‘No Excuse for Muted Returns,’ CEO Says

Private equity, which made up 16 percent of the portfolio, was the best performer, gaining 21 percent. Public equities, the largest portion of the fund at 31 percent, returned 14 percent. The value of the private equity portfolio was $8.5 billion.

Harvard Management embarked on an ambitious overhaul at the beginning of 2017 and said it will take five years to see the full results. Narvekar arrived from Columbia University’s endowment at the end of 2016, brought in senior managers and reduced head count. He cut internally-run hedge funds, hired external managers and spun out others.

‘Unkind Surprises’

Narvekar said that his first 19 months on the job “have featured some unkind surprises,” without explaining further.

The endowment sold more than $600 million of natural resources assets in fiscal 2018 and wrote down $126.9 million of assets. The portfolio’s value declined to less than $2.2 billion from $2.9 billion in the prior period.

“This team has made great progress in their multi-year repositioning of the portfolio, selling certain assets and improving the management of others,” Narvekar wrote.

Narvekar also reduced real estate assets, which made up 13 percent of the portfolio. The value of that portfolio fell to $4 billion, driven by the sale of more than $1 billion of assets. Hedge funds were 21 percent of the portfolio, and their value rose to $12.9 billion from almost $8 billion a year ago. Both real estate and hedge funds produced single-digit returns in the fiscal year.

Risk Level

“Looking beyond the returns of individual asset classes, asset allocation -- or risk level -- was the dominant factor in the overall returns,” Narvekar wrote. “In general, the higher the risk level, the higher the return.”

Narvekar said the endowment’s “risk framework” was completed in fiscal 2018. He wrote that Harvard Management will be in discussion with its board “to determine Harvard’s risk appetite,” an exercise that will take at least two years.

Harvard’s endowment, along with most of its peers, surpassed the Cambridge Associates’ median gain of 8.3 percent for endowments of all sizes in the 12 months through June 30.

As Harvard’s undergraduate admissions practices are at the center of a federal court trial in Boston, the university showed that it’s still a fundraising powerhouse. It collected a record $1.4 billion in gifts in the fiscal year, driven by a five-year capital campaign that concluded in June with $9.6 billion, the most ever raised in higher education.

The university’s revenue rose to $5.2 billion, with an operating surplus of $196 million in the fiscal year, according to the annual report. The university’s net assets rose 7 percent to $47 billion, driven by endowment returns and gifts.

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