CSUN University News Clippings

Harvard endowment loses about $8 billion

(December 3, 2008)

By JOHN HECHINGER

Harvard University’s endowment, showing how the financial crisis is shaking U.S. higher education, has suffered investment losses of 22% since the end of the school’s fiscal year.

The Harvard endowment, the biggest of any university, stood at $36.9 billion as of June 30, meaning the loss amounts to about $8 billion, more than the entire endowments of most colleges. In a letter to the school’s deans, Harvard President Drew Gilpin Faust and Executive Vice President Edward Forst blamed “severe turmoil in the world’s financial markets.” (See Harvard’s letter.)

The letter said the 22% loss understates the actual decline in the endowment because it doesn’t reflect certain assets, including private equity and real estate, for which estimates of their drops weren’t yet available.

Harvard officials said they were planning for a decline of 30% in value for the year. Harvard said the school’s worst single-year investment loss was 12.2% in 1974, when the endowment stood at less than $1 billion and its funds contributed far less to the school’s operations. Currently, income from the endowment funds 35% of Harvard’s $3.5 billion budget.

Harvard’s loss is especially striking given the endowment’s formerly chart-topping investment performance. Harvard posted an 8.6% return in the year ended June 30, a year when most endowments are expected to report declines. Its annualized 10-year investment performance through that date was 13.8%, compared to 6.1% for the for the median large endowment fund. Since the big loss in 1974 — the worst over the last 40 years – Harvard’s endowment suffered only three other down years, ranging from negative .5% to -3%.

Harvard and Yale, which has had even stronger returns, pioneered an approach that deemphasized plain-vanilla U.S. stocks and bonds and placed large sums in more exotic and illiquid investments, including timber land, real estate and private equity funds. That strategy helped the schools sidestep the much of the carnage in the aftermath of the technology boom in 2000. But the current market may not be so kind since the schools have relatively small holdings of bonds, such as U.S. treasuries, which are among the only assets that have performed well.

Harvard has sought to offload about $1.5 billion in investments with private-equity firms, according to people familiar with the situation. If the Harvard portfolio trades, the transaction would be one of the largest-ever
sales of a private-equity stake.

Many other endowments have copied the Harvard and Yale approach. Moody’s Investors Service, the bond rater, estimates that college endowment losses averaged 5% to 7% in the year ended June 30. Since then, including spending and stock market losses, Moody’s figures colleges experienced another 30% decline in cash and investments.

Wealthy colleges have been under attack from Congress for hoarding their endowments, rather than spending them on efforts to make college more affordable. Harvard, Yale and others have recently sweetened financial aid, even for upper middle class families.

Harvard says it is taking a hard look at expenses because of the endowment losses. Many other elite colleges, including Brown and Cornell, have announced budget-cutting measures, including hiring freezes.

In their letter, Dr. Faust and Mr. Forst said the endowment loss has “major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the economic crisis.” Along with federal research funding, universities rely heavily on tuition and donations. Strained family finances could make it difficult for more families to afford tuition and make hefty gifts.

To maintain its programs and commitments, Harvard says it is expecting to spend a higher percentage of its endowment than it had recently, though it offered no details.

The letter says Harvard may need “not merely contemplate changes at the margin,” but instead “take a more fundamental look at how to align our spending with revenues that will be significantly reduced from what we had imagined just a few months ago.”

Mirroring an earlier letter from Dr. Faust, Harvard said it was looking at budget cuts, including a “hard look at hiring, staffing levels and compensation.” In addition, the school said it was “reconsidering the scale and pace of planned capital projects,” including the school’s expansion into Boston’s Allston neighborhood, which has been described by the school as a multibillion-dollar build-out that will take 50 years.

Citing the “fluid and unpredictable environment,” Harvard said it would take advantage of its sterling credit rating to raise cash. The school expects to issue a “substantial amount of new taxable fixed-rate debt” to give the school more financial flexibility and maintain “momentum” in academics and research, as well as financial aid. Harvard said it would convert much its short-term debt to long-term issues to “reduce our exposure to volatility in the credit markets.”

Write to John Hechinger at john.hechinger@wsj.com

Publication: The Wall Street Journal