UPDATED: September 28, 2016, at 10:40 a.m.

The near $2 billion drop in Harvard’s endowment will limit funding for University programming, a “disappointing” development that has prompted a reconsideration of Harvard Management Company’s entire investment strategy, University President Drew G. Faust said in an interview Tuesday.

Last week, HMC announced that the endowment—the largest of any university in the world—had lost almost $2 billion in value, shrinking to $35.7 billion in value at the end of fiscal year 2016, down from $37.6 billion at the end of fiscal year 2015. A negative 2 percent return on Harvard’s investment portfolio combined with other financial flows, including the $1.7 billion HMC distributed to fund Harvard's over a third of the Harvard's annual budget, to result in the endowment’s drop in value.

The negative returns, significantly below HMC’s internal benchmark of 1 percent and the latest in a series of underwhelming results, will put pressure on budgets across the University. {shortcode-ba5ca8a642b1b15a4f1ce2d3b835007bd3c08ad0}

“Returns like this constrain our budgets, which means it constrains our ability to do all kinds of things. That is disappointing,” Faust said, citing new programs, faculty, and research funding as areas that could be adversely affected because of the endowment’s performance. Schools across the University plan their budgets with an expectation that the endowment will increase, not contract, in size every year, she added.

Faust also said she was concerned that Harvard’s investment performance has continued to lag behind that of its peers. While fiscal year 2016 was generally difficult for large institutional investors, Yale and MIT, for example, managed to return 3.4 percent and 0.8 percent on their respective investment portfolios.

“In terms of our relationship to our peers we didn't do very well. So that’s disappointing as well,” Faust said.

The consistent underperformance may lead to a new approach to investing at HMC. Traditionally, Harvard has employed a “hybrid model” of endowment investing, employing both internal and external managers to invest its funds. Now, Harvard has started to outsource more of its investments to external managers. Interim HMC CEO Robert A. Ettl wrote in his fiscal year 2016 report that HMC had placed some public equity assets, usually managed in-house, under external management.

“We’re also looking really hard at the model that HMC has followed,” Faust said. “And we are looking at that to make sure that we do what works best.”{shortcode-decfbeeb05aba9752bc0defbda935680ad4d892e}

One person with a significant role in determining “what works best” will be the fund’s next CEO, Faust said. Former HMC CEO Stephen Blyth resigned in July after only 18 months in his post; he departed for personal reasons. While Faust declined to name specific candidates under consideration for the still-vacant seat, several news outlets have named Amy C. Falls, the chief investment officer at Rockefeller University, and N.P. Narvekar, who heads Columbia’s endowment, as leading candidates.

“We want to make sure we have a really strong leader,” Faust said. “So the identification of such a person is a major part of improving performance.”

—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.