Continuing five years of steady growth, Harvard's endowment grew by 20.5 percent during the fiscal year ending June 30, the Harvard Management Company (HMC) announced in its annual letter yesterday.

Moreover, the returns outperformed the 17.1 - percent goal set by HMC's Board of Directors.

"It's a terrific year when we outperform the benchmark by one point or more," said HMC President Jack R. Meyer. "I don't think it's realistic to expect any institutional fund to do that over more than one year."

Rising with the sustained bull market, Harvard's returns have outperformed HMC's benchmark by 3 percent or more over the past five years. Last year's returns, however, declined from 25.8 percent in 1997 and 26 percent in 1996. ,

HMC performed the strongest in domesticequities, where Harvard's investments returned38.5 percent versus a benchmark of 29.3 percent.

Investments outperformed the benchmarks in allasset classes except emerging markets, where HMClost 22.8 percent compared to a projected loss of22.6 percent.

Since the Asian financial crisis began over ayear ago, foreign markets have seen sharp drops.Harvard's investments in emergingmarkets--including Russia, Brazil, Argentina,Korea, Taiwan, India and South Africa--also postedheavy losses.

HMC invests 9 percent of the University'sendowment in foreign emerging markets, versus 36percent in domestic equities.

"[HMC] has a smart asset allocation model andsuccessful investments," said Elizabeth C."Beppie" Huidekopper, Harvard vice president forfinance.

Although Harvard's investments outperformed 95percent of all institutional funds, the endowmentunderperformed the Standard and Poor's 500 index,which rose 28.6 percent. HMC outperformed the DowJones Industrial Average, which rose 18.2 percentduring Harvard's fiscal year.

HMC also announced in the letter that a groupof employees from Harvard Capital Group, whichmanaged Harvard's real estate and private equityinvestments, left in July to form CharlesbankCapital Partners, a Boston-based limited liabilitycompany.

HMC has pledged $550 million to invest inCharlesbank's funds. In addition, Charlesbank willcontinue to manage Harvard's existingdirectly-held private equity and real estateassets.

Harvard invests 7 percent of the endowment inreal estate and 15 percent in private equities,according to the strategy set forth in its policyportfolio.

Also in July, Jonathon S. Jacobson departedfrom HMC after eight years during which he becamethe company's top picker--personally managing $1.6billion in equities and a $450 million emergingmarket fund.

Jacobson pioneered Harvard's strategy ofinvesting in hedge funds--risky funds which tradein options and other derivatives.

Jacobson left to begin a new investment firm,Highfields Capital which specializes in hedgefunds.

"His departure is clearly a disappointment,"Meyer wrote in the letter. "We do expect that Jonwill continnue to do well and Harvard hascommitted an aggregate of $500 million to his newfirm.