Harvard endowment up 11.3% in year

Ends period with $32.7b; investments slightly lag rival

The Harvard University endowment posted an 11.3 percent gain on its investments for the fiscal year ended June 30, up from a roughly flat performance in the prior 12 months but slightly underperforming its rival Yale University.

Harvard’s gain outpaced its own internal goal and broad market indexes, ending the year with $32.7 billion in assets. US and foreign stocks drove the performance, with hedge funds and real estate also reaping significant gains for the nation’s largest university endowment, even as returns in bonds and emerging markets were modest.

Five years into her tenure as chief executive of Harvard Management Co., Jane Mendillo trumpeted the endowment’s improved performance since the financial crisis and the measures she has taken to reduce risk.

“I am very proud of the internal and external managers we have in place and the results they have achieved,” Mendillo said in her annual report on the endowment released Tuesday. She said managers outperforming their benchmarks had added $600 million to the university’s portfolio “over and above the markets.”

While the Standard & Poor’s 500 index jumped 20.6 percent in the fiscal year, Harvard’s portfolio is diversified with a mix of bonds, commodities, private equity, and other assets. A hypothetical portfolio composed of 60 percent global stocks and 40 percent bonds would have risen 10 percent in the year.

Meanwhile, Yale said its $20.8 billion endowment had a 12.5 percent return over the same period. And the $53 billion Massachusetts state pension fund also outpaced Harvard with a 12.7 percent gain.

Mendillo has sought to lower risk in the Harvard endowment since it lost more than one-quarter of its value in the turbulent market of 2008-2009. Her more cautious approach has brought even but less spectacular returns than Harvard enjoyed at times in the past.

Mendillo has made big bets on emerging markets and real estate investments, while also reducing fixed-income holdings as a long bull market in bonds ended.

She has also ended a practice of borrowing additional money to invest as a strategy to boost returns.

The university counts on the endowment to deliver more than one-third of its annual operating budget. Excluding this sum, which Harvard did not disclose Tuesday, the endowment would have regained its peak asset level of nearly $37 billion reached before the financial crisis, officials said. Last weekend, Harvard announced a new campaign to raise $6.5 billion from alumni and other donors by 2018.

Mendillo said in the outlook section of her report that “the world’s economies and markets continue to be full of uncertainty,” including challenges with the federal budget and debt problems overseas. But she sees potential for Harvard’s endowment in areas where the fund is looking for opportunities, such as direct real estate investments.

The new strategy of investing directly in real estate deals generated a return of 15.8 percent last year, compared with a 5.3 percent return from the endowment’s older real estate fund investments.

Mendillo also continues to believe that emerging markets, where the fund has increased its stake, will pay off over the long term. That wasn’t the case last year, when Brazil, India, and China all posted disappointing returns, she said.

Harvard’s historic strength in managing bonds came through last year, with the endowment eking out singe-digit gains in fixed-income, even as bonds generally lost money.

Endowment managers are keeping an eye on private equity — an asset class that has delivered an 11 percent return last year. Private equity returns have been decreasing over time, making the investments potentially less attractive than public stocks that are easier to buy and sell.

“As a result, we are actively focused on honing our private equity strategy to maintain the highest concentration in the very best managers with the greatest potential to add value,’’ Mendillo said.