Endowment's Growth Rising But Middling

Showing average performance, the University's endowment returned 16.8 percent for the fiscal year 1995 and rose to more than $7 billion, according to the soon-to-be-released annual letter of the Harvard Management Company (HMC).

Last year's endowment totaled approximately $6 billion.

Although better in absolute terms than last year's 9.8 percent, returns for this year, which concluded June 30, are less impressive because the domestic markets performed very well in the first half of 1995.

"While the absolute return of 16.8 percent is substantial, relative performance in fiscal 1995 was somewhat disappointing," President Jack R. Meyer wrote in the letter. "This is the first time in the last four years that we have fallen short of our performance benchmark."

Meyer had no comment when he was contacted yesterday.

The endowment's return was hurt by its diversification, which leads it to invest less in domestic equities than in other major funds. It was the same diversification, however, that led to last year's success.

"Large capitalization domestic equity was the asset class to own, and diversification into almost any other asset class hurts returns," Meyer wrote in the letter.

"The benefit of diversification is over the long-term, but when stocks are hot you get hurt," added a source close to HMC.

University officials contacted echoed Meyer's words from the letter.

"I think they [the returns] were good. Straight equities did better than the S&P [Standard and Poor's 500 stock index], though they didn't meet their benchmark," said Robert G. Stone Jr. '44, a member of the Corporation, Harvard's governing board.

"Therefore, they didn't do as well as they should have, but I'm quite pleased we did as well as we did," Stone added. "We compete against Yale and Princeton, and I'm sure we did quite well against them."

Yale's and Princeton's returns were not available yesterday.

Not everyone, however, expressed pleasure with the performance.

Long-time HMC critic and major University donor Albert F. Gordon '59 said he found the performance "run of the mill."

Gordon added that he has proposed to the University that large donors be allowed to have outside managers invest their endowment contributions.

"Now, I refuse to give to endowment because of the Management Company," he said. "If they let us choose to use outside managers, I've told them I'd give to endowment."

Comparative Performance

The endowment ended up performing at about the average of comparable funds.

It was just below the Trust Universe Comparison Service (TUCS) median--a measure of 68 large institutional funds with assets between $1 and $10 billion--which was up 16.9 percent.

In relative terms, the University's endowment performed significantly below last year, when it placed in the top five percent of comparable funds.

Stephen J. Remboski, a manager of TUCS for Wilshire Associates, said that the returns mean that the University "did average."

He added, however, that in a climate like last year's relative performance was "determined almost entirely by the amount of domestic stocks in the portfolio."

The domestic equity portion of the endowment did out-preform the Standard and Poor's 500 stock index, which had a 9.7 percent return, versus the index's gain of slightly more than 25 percent.

The performance also fell 0.4 percent short of HMC's internal benchmark, the Policy Portfolio, which it uses to determine the success of its year.

The Good and the Bad

According to a source familiar with HMC, one area that hurt the endowment's return was that it was "underweight in technology"--an area which saw a return of about 90 percent--meaning the company did not have enough of its assets invested in technology.

But the technology investments it undertook did well. A private equity investment of about $20 million in Softkey, a technology firm, was sold for more than $100 million during the year, the source said.

Another industry insider speculated that investments in the Far East and those affected by the Mexican peso devaluation performed poorly and brought down the overall gains.

He also echoed the proposal by some long-time HMC critics that the company should reveal how many of its investments involve derivatives.

Regarding specific aspects of the portfolio: domestic equities returned 29.7 percent, foreign equities gained 4.7 percent, emerging market securities rose 0.7 percent and high-yield securities advanced 15.1 percent.

In addition: real estate gained 12.1 percent, private equities rose 25.7 percent, domestic bonds advanced 9.8 percent, foreign bonds were up 23.4 percent and commodity-based investments were down 5.5 percent.

Long-Term Performance

In the annual letter, HMC also reviewed its performance since Meyer and the current management arrived four years ago.

Over those four years, the endowment's average annual performance was 13.7 percent. This return was two percent above the Policy Portfolio and 2.1 percent higher than the median fund as measured by TUCS.

During this time period, HMC exceeded the consumer price index inflation rate by 10.8 percent--considerably above the company's six percent target. It also bested the Policy Portfolio by two percent, a margin above its goal of between 1.5 and two percent. According to the letter, HMC does not believe such a margin is sustainable

University officials contacted echoed Meyer's words from the letter.

"I think they [the returns] were good. Straight equities did better than the S&P [Standard and Poor's 500 stock index], though they didn't meet their benchmark," said Robert G. Stone Jr. '44, a member of the Corporation, Harvard's governing board.

"Therefore, they didn't do as well as they should have, but I'm quite pleased we did as well as we did," Stone added. "We compete against Yale and Princeton, and I'm sure we did quite well against them."

Yale's and Princeton's returns were not available yesterday.

Not everyone, however, expressed pleasure with the performance.

Long-time HMC critic and major University donor Albert F. Gordon '59 said he found the performance "run of the mill."

Gordon added that he has proposed to the University that large donors be allowed to have outside managers invest their endowment contributions.

"Now, I refuse to give to endowment because of the Management Company," he said. "If they let us choose to use outside managers, I've told them I'd give to endowment."

Comparative Performance

The endowment ended up performing at about the average of comparable funds.

It was just below the Trust Universe Comparison Service (TUCS) median--a measure of 68 large institutional funds with assets between $1 and $10 billion--which was up 16.9 percent.

In relative terms, the University's endowment performed significantly below last year, when it placed in the top five percent of comparable funds.

Stephen J. Remboski, a manager of TUCS for Wilshire Associates, said that the returns mean that the University "did average."

He added, however, that in a climate like last year's relative performance was "determined almost entirely by the amount of domestic stocks in the portfolio."

The domestic equity portion of the endowment did out-preform the Standard and Poor's 500 stock index, which had a 9.7 percent return, versus the index's gain of slightly more than 25 percent.

The performance also fell 0.4 percent short of HMC's internal benchmark, the Policy Portfolio, which it uses to determine the success of its year.

The Good and the Bad

According to a source familiar with HMC, one area that hurt the endowment's return was that it was "underweight in technology"--an area which saw a return of about 90 percent--meaning the company did not have enough of its assets invested in technology.

But the technology investments it undertook did well. A private equity investment of about $20 million in Softkey, a technology firm, was sold for more than $100 million during the year, the source said.

Another industry insider speculated that investments in the Far East and those affected by the Mexican peso devaluation performed poorly and brought down the overall gains.

He also echoed the proposal by some long-time HMC critics that the company should reveal how many of its investments involve derivatives.

Regarding specific aspects of the portfolio: domestic equities returned 29.7 percent, foreign equities gained 4.7 percent, emerging market securities rose 0.7 percent and high-yield securities advanced 15.1 percent.

In addition: real estate gained 12.1 percent, private equities rose 25.7 percent, domestic bonds advanced 9.8 percent, foreign bonds were up 23.4 percent and commodity-based investments were down 5.5 percent.

Long-Term Performance

In the annual letter, HMC also reviewed its performance since Meyer and the current management arrived four years ago.

Over those four years, the endowment's average annual performance was 13.7 percent. This return was two percent above the Policy Portfolio and 2.1 percent higher than the median fund as measured by TUCS.

During this time period, HMC exceeded the consumer price index inflation rate by 10.8 percent--considerably above the company's six percent target. It also bested the Policy Portfolio by two percent, a margin above its goal of between 1.5 and two percent. According to the letter, HMC does not believe such a margin is sustainable