Years of lackluster returns distress Harvard’s president
It’s a rare day when the president of Harvard University openly frets about the investment performance of its endowment, the largest in the education world.
But that’s exactly what Drew G. Faust did this week, making clear that the $37.6 billion fund is on watch, after being trounced by its Ivy League rivals — not just last year, but over 10 years.
Faust told the Harvard Crimson she was concerned that the school’s results badly lagged those of peers such as Yale University and the Massachusetts Institute of Technology. Harvard relies on its endowment to fund 35 percent of its yearly budget.
“It’s very much a concern for Stephen Blyth, who has been making significant changes,” Faust said to the student-run newspaper, referring to the endowment’s investment chief. Faust said she has full confidence in Blyth, who took over in January, but her comments highlight the growing frustration with the fund’s returns.
Faust declined to be interviewed by the Globe.
Harvard posted a 5.8 percent return for the year ended June 30, while Yale gained 11.5 percent and MIT did better than any of the elite schools so far, rising 13.2 percent. Over 10 years, Harvard’s annual average return is 7.6 percent, trailing Yale’s 10 percent.
Over a decade, that adds up, to billions of dollars in lost potential.
“That’s pretty significant dough. It would’ve been nice to earn it,’’ said Charles Skorina, an executive recruiter in San Francisco whose firm closely tracks the performance and pay of staff at the nation’s top endowments.
Blyth has calculated that the investment fund can meet Harvard’s needs so long as it produces a return of at least 5 percent a year, after inflation.
But he also knows that’s not good enough. Harvard needs to beat the pack, both to grow and to win ivory tower bragging rights. In his annual letter, released last month, Blyth set an ambitious goal to be in the “top quartile” of Harvard’s top 10 peers, which would mean ranking in the top two or three.
He’s in the midst of a housecleaning and an overhaul of the endowment’s investment approach, which so far has involved four executive departures. Andrew Wiltshire, Harvard’s head of alternative assets, announced last month that he will retire this year, and the two top natural-resources managers, along with a fixed-income manager, recently left.
In a letter to staff last Friday, Blyth said the group has made strides in the past nine months, but there is hard work ahead.
“With a team that is fully aligned with our objectives and investment process, I am highly optimistic we will be able to deliver for Harvard,’’ Blyth wrote.
But critics are asking how the broadly diversified portfolio approach, honed at Yale and Harvard and now largely adopted industrywide, has apparently failed at Harvard, with the highest-paid staff in the industry. Over the past five years, Harvard would have made more money, by its own calculation, investing in a simple 60/40 percent mix of US stocks and bonds.
Yet when it comes to judging performance, “Rain or shine, you can’t really tell the difference when you just look at the money being paid at Harvard Management,’’ said David Kaiser, a member of a group of Harvard alumni that has long been critical of the endowment managers’ multimillion-dollar pay.
Kaiser also said he’s concerned that more public pressure on the endowment managers could spur them to take on too much risk, as happened in the run-up to the financial crisis.
Blyth’s predecessor, Jane Mendillo, started the job in July 2008, just before the global financial crisis hit and the endowment lost 27 percent of its value. After spending a couple of years cleaning up risky positions she had inherited, she may have remained conservative for too long, according to people who know her and follow the endowment closely.
Former Harvard president Lawrence H. Summers, who presided at the university before the crisis, also criticized the endowment, telling the Crimson it was “deeply troubling” that the fund has lagged peers since then.
Summers had encouraged the university to invest its operating cash in the endowment, a strategy that made money for years, but backfired after he left. Harvard in 2009 disclosed that it lost $1.8 billion in cash invested in the endowment.
Summers has long maintained that the university should have changed course after he left in 2006. Harvard’s former treasurer also acknowledged that at the time.
Said Kaiser, the alumnus, “It has taken President Faust and former president Summers quite a while to complain about performance.”