Harvard Portfolio Writes Down $65M

The value of Harvard's private placement portfolio declined by $65 million in fiscal 1992, Harvard Management Company (HMC) President Jack R. Meyer confirmed yesterday.

The writedowns were the second serious blow in as many years to HMC's Aeneas Group, which includes investments in real estate, energy commodities and venture capital.

Last year, Aeneas saw its assets devalued by $195 million, nearly one sixth of their total worth. The losses played a major role in decreasing HMC's overall return for fiscal 1991 to just 1.1 percent.

This year, the company's overall return on Harvard's $5.1 billion endowment was 11.8 percent.

Meyer declined to specify the amount HMC currently keeps in private placements. The company had just over $1.1 billion invested in the high-risk holdings at the start of this fiscal year.

The most recent loss included writedowns of $15 million in real estate and $45 million in energy commodities, Meyer said. But the HMC president said that despite the losses, HMC's private placements have performed well in a difficult market.

Over the past five years, Aeneas' compound rate of return has averaged 2.8 percent, he said.

"I'm convinced that within the context of thosethree asset classes, that performance is quiterespectable," Meyer said.

"If you benchmark them properly, the numbersactually look pretty good," he said, referring toindustry performance standards for the period.

Aeneas has been under increased scrutiny since1989, when its two managing partners earnedperformance bonuses in the high six figures thatput their salaries over $1 million each.

The bonuses came just two years before lastyear's record devaluations, prompting some expertsto suggest that they were based on significantlyinflated asset valuations.

Aeneas Managing Partner Scott M. Sperling--whohas been the focus of much of the criticism--wouldnot comment on the company's performance. Sperlingannounced this week that he is taking a two-weekleave of absence from HMC to volunteer for thepresidential campaign of Arkansas Gov. BillClinton.

Harvard exceeded its internal performancebenchmarks in both real estate and venture capitalbut not in commodities, Meyer said in a recentletter to several alumni.

The company's real estate holdings showed anegative return rate of 9.2 percent against abenchmark of negative 20.4 percent, while itsventure capital holdings returned 22.6 percentagainst a benchmark of 20.7 percent, according tothe letter.

But in the commodities sector, Aeneas's rate ofreturn was negative 33.5 percent, more than fivetimes lower than the benchmark of 7.3 percent,according to the letter.

Meyer said that the company stands to earn backmuch of the loss in commodities as oil and gasprices rebound over the next several months. Hesaid that the benchmark index forcommodities--calculated using spot prices--ismisleading, since the valuations are determinedusing average prices over a 12 month period.

And the HMC president said that commoditiesonly comprised about two percent of HMC's overallholdings in 1992, far less than the six percentthe company's policy portfolio indicates. Thatportfolio--which outlines the general breakdown ofHMC's holdings--also calls for the company toinvest 12 percent in venture capital and sevenpercent in real estate.

Industry experts contacted by The Crimson saidthat HMC's portfolio may provide for good, thoughuneven, growth over the long term. But the expertssaid that the breakdown outlined in HMC's plan wasnot a wise one for the last several years.

"This has not been the five years to have beenstructured this way," said A. Michael Lipper,president of New Jersey-based Lipper AnalyticalServices. "For the future, this could bebrilliant...but whether the University can takethe kind of volatility that there may be in that,I don't know."

Critics of the management company were not asoptimistic, however. One finance expert close toHMC said last night that, despite a poor market inreal estate and commodities, Harvard's performancehas lagged behind the industry average.

"It's substantially below what one would expectfrom a return on capital in almost any asset classover that period of time," said the expert, whospoke on condition of anonymity. "I think it'sbeen a tough five years, but I think people canfully expect a strong performance to have providedsome real return on the investment; 2.8 percent isbarely keeping pace with the rate of inflation."

And Albert F. Gordon '59, a longtime benefactorof the University, said the measure of HMC'sperformance means little unless the companyreleases a list of its investments.

"Since Harvard does not disclose itsinvestments in Aeneas, and does not give anyinformation as to the acquisition cost or themethodology in arriving at a current value, thereis no way that an objective observer could commenton the results," Gordon said.

"As such, it must be taken on blind faith," headded. "I, as an investor, do not recommend blindfaith."

Meyer has repeatedly refused to identifyHarvard's private placements, saying that it wouldput the company at a competitive disadvantage

"I'm convinced that within the context of thosethree asset classes, that performance is quiterespectable," Meyer said.

"If you benchmark them properly, the numbersactually look pretty good," he said, referring toindustry performance standards for the period.

Aeneas has been under increased scrutiny since1989, when its two managing partners earnedperformance bonuses in the high six figures thatput their salaries over $1 million each.

The bonuses came just two years before lastyear's record devaluations, prompting some expertsto suggest that they were based on significantlyinflated asset valuations.

Aeneas Managing Partner Scott M. Sperling--whohas been the focus of much of the criticism--wouldnot comment on the company's performance. Sperlingannounced this week that he is taking a two-weekleave of absence from HMC to volunteer for thepresidential campaign of Arkansas Gov. BillClinton.

Harvard exceeded its internal performancebenchmarks in both real estate and venture capitalbut not in commodities, Meyer said in a recentletter to several alumni.

The company's real estate holdings showed anegative return rate of 9.2 percent against abenchmark of negative 20.4 percent, while itsventure capital holdings returned 22.6 percentagainst a benchmark of 20.7 percent, according tothe letter.

But in the commodities sector, Aeneas's rate ofreturn was negative 33.5 percent, more than fivetimes lower than the benchmark of 7.3 percent,according to the letter.

Meyer said that the company stands to earn backmuch of the loss in commodities as oil and gasprices rebound over the next several months. Hesaid that the benchmark index forcommodities--calculated using spot prices--ismisleading, since the valuations are determinedusing average prices over a 12 month period.

And the HMC president said that commoditiesonly comprised about two percent of HMC's overallholdings in 1992, far less than the six percentthe company's policy portfolio indicates. Thatportfolio--which outlines the general breakdown ofHMC's holdings--also calls for the company toinvest 12 percent in venture capital and sevenpercent in real estate.

Industry experts contacted by The Crimson saidthat HMC's portfolio may provide for good, thoughuneven, growth over the long term. But the expertssaid that the breakdown outlined in HMC's plan wasnot a wise one for the last several years.

"This has not been the five years to have beenstructured this way," said A. Michael Lipper,president of New Jersey-based Lipper AnalyticalServices. "For the future, this could bebrilliant...but whether the University can takethe kind of volatility that there may be in that,I don't know."

Critics of the management company were not asoptimistic, however. One finance expert close toHMC said last night that, despite a poor market inreal estate and commodities, Harvard's performancehas lagged behind the industry average.

"It's substantially below what one would expectfrom a return on capital in almost any asset classover that period of time," said the expert, whospoke on condition of anonymity. "I think it'sbeen a tough five years, but I think people canfully expect a strong performance to have providedsome real return on the investment; 2.8 percent isbarely keeping pace with the rate of inflation."

And Albert F. Gordon '59, a longtime benefactorof the University, said the measure of HMC'sperformance means little unless the companyreleases a list of its investments.

"Since Harvard does not disclose itsinvestments in Aeneas, and does not give anyinformation as to the acquisition cost or themethodology in arriving at a current value, thereis no way that an objective observer could commenton the results," Gordon said.

"As such, it must be taken on blind faith," headded. "I, as an investor, do not recommend blindfaith."

Meyer has repeatedly refused to identifyHarvard's private placements, saying that it wouldput the company at a competitive disadvantage