Endowment Falls 7%, Hits $3.85B in Crash

Harvard's endowment sunk from more than $4 billion to $3.85 billion in the October stock market crash, but fell at a rate far less than the market overall, according to figures to be released today in the University's annual financial report.

The endowment, which more than doubled in the five-year bull market, fell 7 percent, or approximately $290 million, in October, the annual report said. In the same month, the Standard and Poors Index of 500 stocks, one of the principal market barometers, plunged 22 percent.

Harvard cushioned its losses by relying on hedging techniques, which insure that investors profit from their holdings despite market fluctuations, said Walter M. Cabot '55, president of Harvard Management Company, the University's in-house investment management team. "We tried to bet against what others were doing and we happened to be effective," he said.

"We had to make very bold moves to protect Harvard's assets," Cabot added.

Harvard also decreased its exposure to a market drop by packing its portfolio with bonds and selling off some of its foreign stocks, Cabot said. At the end of the financial year, the portfolio contained 53 percent stocks and 26 percent bonds, but by October stock comprised less than 40 percent, said Financial Vice President Robert H. Scott, who refused to specify the exact portion of stocks.

Harvard's portfolio now holds more bonds than in the past and is taking "a historically low equity position" said Cabot, who would not specify the exact bond to stock ratio. The endowment has fluctuated since the market plunge, but currently remains at about the $3.85 billion level, he added.

"When the future is unclear as it is, it strikes me to be prudent to have a reasonably conservative investment position," Cabot said, explaining Harvard Management's increased reliance on interest-bearing bonds. "The possibility of a recession" makes for an unstable investment climate," he added.

Cabot said he commandeered a "swat team" of money managers to manuever Harvard's holdings during the market crisis. Aside from contacting Wall Street firms in the volatile period, Harvard Management was "praying," he said.

Financial experts agreed that Harvard did well in comparison to the rest of the market. "Harvard came through it pretty much unscathed," said an analyst at Dean Whitter Reynolds.

"They tried to avoid calamity. It sounds like they did a good job at it," said Michael Patrick '65, manager of the University of Texas's endowment, the nation's second largest endowment after Harvard's.

The University of Texas's endowment decline matched Harvard's, falling 7 percent to $3.5 billion.

The Henley Group, Harvard's largest holding as of the end of the fiscal year, fell from $58 to $30 in the crash. At the end of the fiscal year, the University held $73 million in Henley, a manufacturer of industrial products.

The University's other top holdings, Digital Equipment and IBM dropped sharply, losing $74 and $41 respec- tively. At the end of the fiscal year Harvardheld $55 million in Digital and $19 million inIBM. Financial experts said these leading computerstocks are expected to rebound in the coming year,as the technology market expands.

The University recently announced plans tospend more endowment income to run Harvard, in aneffort to take advantage of previous bull marketgrowth. Until now Harvard has reinvested the bulkof its endowment earnings--allowing the fund'spay-out rate to slip below inflation and usingother sources of income, such as tuition andfundraising, to fund a greater portion of thebudget.

Despite the endowment's market losses, Cabotsaid, the increased spending of endowment incomewill not undermine its long-term growth. Becausemore interest-bearing bonds are in the endowmentnow, the fund is generating more interest incomethan it did from stocks in the bull market earlierthis year. "We are better able to finance a higherpayout today than we were October 18," Cabot said,referring to the day before the market free-fall.

Harvard's relatively low losses also put it inan excellent position to pay out more income. "IfHarvard had done as poorly as the general marketit couldn't have been as generous with endowmentfunds," said the analyst at Dean Whitter