HMC Reshuffles Equity Investments

After slashing two-thirds of its publicly traded stock holdings in the fourth quarter of last year, Harvard has substantially reshuffled its equity investments and expanded its emerging and foreign markets portfolio, according to a Securities and Exchange Commission disclosure report released last week.

Though the disclosed assets represent only a small fraction of the University’s total holdings, the report provides a glimpse of how Harvard Management Company—the group that oversees the University’s multi-billion dollar endowment—is navigating this year’s tumultuous and markedly changed financial landscape. University officials say they have been planning for a total 30 percent drop in the endowment by the end of the current fiscal year.

Despite an increase in public equity holdings to almost $772 million by March 31, up from $571 million in the previous quarter, the University has still dramatically reduced its publicly traded equities portfolio, which was valued at almost $2.9 billion as late as last September. Harvard appears to have redirected many of its investments after those sales, with the number of reported holding entries increasing from 71 to 99, two-thirds of which are new investments.

In the latest quarter ending March 31, Harvard boosted its investments in foreign markets by purchasing almost $50 million worth of shares in an exchange-traded fund tracking South Korean indices, while also deepening investments in China, Mexico, Brazil, and South Africa that now amount to nearly $300 million—close to double the figure in those areas as of Dec. 31.

Harvard also purchased over 2 million shares of Vanguard Emerging Markets, bringing the value of that investment to over $54 million, up from the less than $1 million invested there in the previous quarter. The largest holding listed in the latest 13F filings continued to be the $205 million invested in the iShares MSCI Emerging Markets Index Fund. But both the value of that investment and the number of shares owned have declined since the last filing, which showed University holdings as of Dec. 31. Harvard then had $224 million invested in the fund—a substantial dollar value reduction from the $463 million it had invested in the fund as of Sept. 30 but still nearly 40 percent of the University’s total reported holdings.

The report also suggests that Harvard is shuffling its other equity holdings, with over half of the investments listed on the previous quarter’s filing sold off. Notable new equity investments include $9.7 million worth of shares in Rupert Murdoch’s media giant News Corp.; $16 million in China Mobile, the world’s biggest wireless-phone carrier; $13 million in Teva Pharmaceutical, the world’s largest generic drug maker; and $3.5 million in Sprint Nextel Corp.

The increasing emphasis on emerging market equity has likely helped hedge against dramatic declines in the domestic stock market. While the S&P 500 fell 12 percent from Dec. 31 to March 31, the MSCI Emerging Markets Index has remained essentially flat over that period.

The SEC’s Form 13F requires institutional investment managers that oversee more than $100 million in exchange-traded stocks and closed-end companies to report those holdings. Companies are “closed-end” if they sell a fixed number of shares that are traded on exchanges, whereas open-end companies, such as mutual funds, collect public money and invest the funds in stocks, bonds, and other securities.

Harvard also invests extensively in foreign stocks, private equity, fixed-income bonds, and real assets not listed on the filings. External investment firms currently manage 70 percent of the endowment. According to its 2008 year-end financial report, emerging market equity made up 10 percent of the University’s portfolio and returned 7.6 percent as of June 30, beating the HMC board-approved benchmark of 4.8 percent for the asset class.

The year-end report noted that Harvard uses both internal and external managers, as well as international private equity funds, to oversee its emerging market equity, and listed as one policy change for the coming fiscal year “a need to think globally about asset allocation and investment alternatives.” University spokesman John D. Longbrake declined to comment on whether the increasing emphasis on emerging and foreign equity in the most recent SEC filings is indicative of a broader portfolio reallocation.

—Staff writer Peter F. Zhu can be reached at pzhu@fas.harvard.edu.