Harvard’s endowment posts 8.1 percent return, lagging behind peers

Harvard has been struggling to right its $37.1 billion endowment.Elise Amendola/Associated Press/file

Harvard University’s endowment, the world’s largest academic fund, continued to trail its peers in the last fiscal year, posting an 8.1 percent return on investments — compared with double-digit returns for many of its peers.

The university has been struggling to right its $37.1 billion endowment, hiring new leadership last year, jettisoning underperforming assets, cutting staff, and restructuring its investment management teams and compensation plans.

But those changes, launched by N.P. “Narv” Narvekar, who joined the Harvard Management Co. Inc. in December 2016 as its chief executive, have yet to turn things around.

“Performance is disappointing and not where it needs to be,” Narvekar said in his letter to the Harvard community Tuesday. “It is an unfortunate truth that the issues that have impacted HMC performance in the past will continue to negatively impact returns in the near term and will require time to overcome.”

Not all universities have posted their endowment returns yet, but many have reported double-digit gains for the fiscal year that ended in June. Academic endowments were generally lifted by the robust performance of the stock market.

During that same period, the total returns for the S&P 500 index reached nearly 18 percent.

The Massachusetts Institute of Technology’s $14.8 billion endowment gained 14.3 percent during the fiscal year that ended in June, while Dartmouth College reported similar gains. The University of Virginia’s $8.6 billion endowment posted a 12.4 percent gain, and the University of California’s $10.8 billion endowment increased 15.1 percent.

But the structural problems that have dogged the Harvard endowment, which funds 36 percent of the university’s annual operating budget, will take years to fix, warned Narvekar, who formerly managed Columbia University’s endowment.

Harvard’s endowment last fiscal year posted a 2 percent loss, also below its peers.

Harvard is well known for its diverse and exotic investment strategy that has included hedge funds, real estate, and natural resources, such as timberland and wineries. Those natural resources dragged down Harvard’s performance this year, Narvekar said.

The university marked down the value of its natural resource investments before Narvekar’s arrival, and the fund reduced their value even more since then, affecting results, according to the endowment report.

That probably means that Narvekar decided the endowment should write off its losses in natural resources now, while it had strong returns in other sectors, said Charles Skorina, an executive recruiter in San Francisco who follows endowments and pensions.

“Had Harvard not decided to take the loss this year, their returns would have been more in line with the other Ivy League schools,” Skorina said.

This probably sets the stage for Harvard and Narvekar to show improved performance in the coming years, he said.

“There’s no good time to take a loss, but now was probably the least bad time,” Skorina said. “You take the loss early in your tenure because then you look better later.”

In his report, Narvekar outlined a list of changes he has made since coming to Harvard, including selling off some of the fund’s real estate and private equity holdings. Investment managers will also be paid based on the performance of the entire fund, not on their own portfolio, which in the past created star investors at Harvard who earned millions of dollars off their bets while the overall fund lagged.

David Kaiser, a member of Harvard’s class of 1969, which has long been critical of how much the endowment pays its executives, said he appreciates Narvekar’s frank assessment of the fund’s longstanding problems, including how it pays managers.

But Kaiser said he worries that the endowment will be less transparent in the future.

On Tuesday, Narvekar further shaded the already murky world of how Harvard invests its endowment funds. The school ended a longstanding tradition of releasing detailed reports on how various groups of investments performed, whether the investments met their benchmarks, and how the overall fund performed historically.

Many universities provide that information to donors and alumni as part of their reports.

Harvard endowment officials said that since the fund is less focused on the performance of individual investment groups, it would no longer offer a more detailed report.