Harvard’s bets abroad not paying a dividend

Foreign investments lagging US markets

This wasn’t exactly the China story Jane Mendillo had in mind.

The chief of Harvard University’s endowment has made a big bet on investments in foreign and emerging markets — 22 percent of a portfolio that exceeds $31 billion. Harvard’s exposure to those markets is greater than that of many other endowments, and significantly higher than the 15 percent the university had earmarked for those sectors in 2005.

The bet has not paid off over the past 18 months, as US markets outpaced those abroad. Now, China is struggling with a credit crunch and the prospect of a slowing economy, developments that have rocked global markets in recent weeks. Other emerging markets are deeply affected by China’s economy, and much of Europe, meanwhile, is mired in recession.


All of that adds up to more challenges for Mendillo as she tries to restore the nation’s largest college endowment to its prerecession levels. The fund had grown to $36.9 billion in assets by June 2008 but suffered investment losses of 27 percent the next year.

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Mendillo has spent the past several years working to decrease risk in the endowment so that any future market downturn won’t inflict such steep losses. But in navigating the thicket of risks, Harvard, like other endowments, has had to make investment choices.

While moving some money out of traditional holdings such as US stocks and bonds, it has invested more in natural resources, such as timber, and in absolute-return hedge funds that are designed to avoid losses.

But the biggest single shift has directed hundreds of millions of dollars into emerging markets, which are not considered a low-risk investment category. Those emerging-market assets now account for 11 percent of the Harvard portfolio, more than double the 5 percent allocation in both 2005 and 1995.

Mendillo acknowledged this move in her last annual report, in September, saying the endowment “carries relatively more exposure to both foreign and emerging markets than many of our peers.” That did not help Harvard in the fiscal year ended in June, as the endowment’s US stocks produced a 9.7 percent gain but foreign equities plunged by double digits. Overall, the endowment fell last year by 0.05 percent.


But that did not scare Mendillo and the other overseers of the fund, who say they invest for the long haul. “We remain convinced that active investing in emerging and international markets is not only wise, but imperative over the long term,’’ Mendillo wrote.

Harvard is hardly alone in this view. In an outlook report last month, Bank of America’s Merrill Lynch Global Research called growth in emerging markets one of a few transformative events reshaping investments for the foreseeable future.

“In this transforming world, the US consumer will no longer be the chief driver of economic growth,” said Chris Wolfe, a Merrill Lynch private banking investment chief. “Growth opportunities are likely to be more global.”

Many people agree with that view over the long term, including Christopher Laine, a senior portfolio manager on the active emerging-markets team at State Street Global Advisors in Boston. But there could be significant headwinds for the rest of this year, he said.

“This is not just China,’’ Laine said. “China slowing is clearly a headwind. Many of the countries in the emerging world are very geared to the China growth story.” In addition, he noted, it doesn’t help that US interest rates are rising, thanks to a likely tapering off of the Federal Reserve’s stimulus program. And political unrest in places like Turkey and Brazil poses risks.


“There are a number of challenges we’re going to have to look to deal with for 2013,’’ Laine said.

Mendillo and Harvard declined to comment for this story. But the numbers are not going their way this year: Emerging markets indexes are down about 14 percent, while US stocks are up about 13 percent, even with their recent volatility.

According to Harvard’s latest public tax filing, from June 2012, the school and its endowment had, for instance, $1.2 billion in assets in East Asia and the Pacific; $198 million in sub-Saharan Africa; $141 million in South America; and $82 million in South Asia, including Afghanistan and Bangladesh.

Yale University’s endowment, against which Harvard’s is often compared, has put less money into emerging markets due to the risks, investing just 2 percent into the sector, according to its latest annual report. With a total of 7.8 percent allocated to foreign equities, Yale is well below the 18.2 percent average weighting for educational institutions.

The Massachusetts state pension fund, with $52 billion in assets, had 6.9 percent of its portfolio in emerging markets as of April 30, significantly less than Harvard’s 11 percent target allocation.

Mendillo has often said that she has positioned the endowment to be more nimble. It has more cash available to take advantage of opportunities and the ability to exit investments, if necessary, rather than being locked into vehicles such as certain hedge funds that kept investors from cashing out in the financial crisis.

While emerging markets are a long-term bet, in the near term they could inflict more pain. In a recent interview, Mendillo declined to say whether the endowment had reclaimed its high ground from mid-2008.

Some rivals were much closer than Harvard to doing so last year. Some, such as the Massachusetts Institute of Technology — with 17 percent of its endowment in international equities — already have.

Beth Healy can be reached at