The Harvard Crimson

Endowment Could Face Low Returns, Experts Warn

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Facing a stagnant global financial market, Harvard Management Company, the firm that oversees the University’s $37.6 billion investment pool, is bracing for potentially low returns for the 2016 fiscal year, according to University President Drew G. Faust and financial experts.

After struggling to keep pace with the endowment returns at peer universities, HMC will likely announce its most recent financial returns later this month, and some Harvard officials have begun to caution that market trends may yield lackluster returns for the University. In an interview with the Harvard Gazette, the University-run publication, published Thursday, University President Drew G. Faust hinted at the possibility of unsatisfying returns.

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“At a time when endowment returns look like they will be constrained maybe for some time to come, people across higher education are very concerned—not just at Harvard but more generally—about how we respond,” Faust told the Harvard Gazette.

If the returns on other large university endowments and investments funds are any indication, Fiscal Year 2016 will not be a banner year for HMC. At least seven public universities with endowments over $1 billion have reported losses so far this fiscal year, a downward trend financial experts attribute to global volatility. In the last few years, Harvard has returned between five and 15 percent on its endowment—a trend that potentially stands to change after the latest fiscal year.

“Essentially the market didn’t do that well, and that’s why they’re not going to have very high returns,” said Roger G. Ibbotson, CIO of the hedge fund Zebra Capital Management. “They’re really conditioned on what happened to the stock market.”

For universities with large endowments widely spread out over financial markets, worldwide economic slumps can be near-unavoidable, said Charles A. Skorina, who manages a firm that recruits financial executives.

“There were no big enough home runs to help Harvard, which has a very big endowment. That’s why most of the endowments are reporting such awful figures: they just had nowhere to go,” Skorina said. “There was no cookie jar full of cookies. They were all empty.” {shortcode-79802979703d17e47f571d12901901d975137e9b}

Low endowment returns could come as the University continues to raise record-breaking amounts of money during its capital campaign, which recently surpassed its $6.5 billion goal. While Harvard announced a $7 billion intake with about two years of fundraising left to go earlier this month, Faust warned that a successful campaign cannot sustain the University’s budget alone.

“The campaign is not a substitute for good endowment performance,” Faust told the Harvard Gazette. “But it can, in some ways, help us counter some of the constraints that might otherwise limit our ability to dream new dreams and introduce new initiatives.”

The potentially poor returns, if in line with broader market trends, would be the most recent in a series of complications HMC has faced over the past few years. This summer, Stephen Blyth resigned as the CEO of the Management Company after less than two years in charge, again casting the financial organization into uncertainty. His departure follows shuffling at the helm of HMC, where even a single percent in returns amounts to hundreds of millions of dollars for University programs and funds.

Still, discussions about any kind of spending constraints will only take place once “we look at how those endowment returns come in, depending on what they turn out to be,” Faust told the Gazette.

Even if returns are disappointing, said David L. Yermack ’85, a professor of finance at New York University, Harvard’s investment horizon is long enough to avoid a major budget crisis.

“You don’t take a direct hit immediately in the budget,” Yermack said. “You have many many years to make the money back; you still have good years as well as bad years.”

While Harvard’s endowment grew at a faster rate than the national average for endowments in fiscal year 2015, it trailed the pace set by some peer institutions. Last fiscal year, HMC posted a 5.8 percent return on its endowment, while Yale, Princeton, and MIT returned 11.5 percent, 12.7 percent, and 13.2 percent, respectively, on their endowments.

—Staff writer Andrew M. Duehren can be reached at andy.duehren@thecrimson.com. Follow him on Twitter @aduehren.

—Staff writer Daphne C. Thompson can be reached at daphne.thompson@thecrimson.com. Follow her on Twitter @daphnectho.