Harvard Endowment Soars to $34.9 Billion

Aug. 22, 2007 — -- It is already, by far, the richest university in the world, but Harvard University just increased its lead over the competition even more.

The Harvard endowment grew 23 percent during the fiscal year, which ended June 30, swelling to a new high of $34.9 billion, the Harvard Management Co., which oversees the university's endowment, said yesterday

This growth represents some of the strongest in the history of the university and was spurred by strong performances from investments in emerging markets, private equity and real estate, Mohammad El-Erian, HMC's chief executive, told ABC News.

Harvard's endowment has been hit hard since its fiscal year ended two months ago. In July, it lost about $350 million through investments with Sowood Capital Management, a hedge fund founded by Jeffrey Larson, the former manager of Harvard's foreign stock holdings.

Despite those losses, Harvard's endowment saw a net gain of 0.4 percent last month, said El-Erian, who led the emerging markets portfolio team at Pacific Investment Management Co. before being appointed HMC chief in 2005.

El-Erian said he views this year's gains as a "windfall" that will not necessarily repeat itself next year, particularly with the turmoil in today's market. He said Harvard has responded to these threats by further hedging its risks, investing in a wide diversity of assets.

"We are relatively, defensively positioned, and we manage this on a day-to-day basis," he said. "What served us well this year was that we were in 11 different asset classes and that we were able to navigate some pretty big potholes that occurred in the markets."

Harvard's enormous endowment is unrivaled among other universities. Yale, which has the second-largest endowment, posted a figure of $18 billion last year. Only three other universities — Stanford, the University of Texas and Princeton — posted endowments of more than $10 billion last year, according to the Chronicle of Higher Education.

"This means that Harvard is not only getting richer, but it's giving itself a much bigger distance between itself and the rest of higher education," said Jeff Selingo, assistant managing editor of the Chronicle of Higher Education. "There are very few of them — in fact none — that are anywhere close to Harvard."

Last year, Harvard funded nearly a third of its operating budget through $1.1 billion in distributions from the endowment. Those funds, normally earmarked by donors for specific purposes, finance projects like student financial aid, faculty salaries and maintenance of the university's libraries, classrooms and dormitories.

Selingo said Harvard is able to see strong returns because its already-large endowment allows it to hire a full-time professional staff of investors and also to take risks most universities cannot afford to take, especially on hedge fund and private equity ventures.

"What's telling is that Harvard lost $350 million in [Sowood] hedge funds. For most colleges, that would wipe out its entire endowment. They can't afford to take this type or risk," he said.

Besides providing Harvard with a yet-bigger dollar amount to flaunt in front of prospective students and faculty, it is unclear how much, if at all, these returns will impact the institution's mission as a university.

One place where that impact might be felt is in the realm of financial aid.

Under its former president, ex-Treasury Secretary Lawrence H. Summers, Harvard launched a new financial aid program that, today, pays the full tuition of college students whose families earn less than $60,000 a year. Partly as a consequence of this program, scholarships and awards to students nearly doubled between 2001 and 2007, from $156 million to $302 million.

Harvard is, traditionally, very conservative in its use of the endowment, but as returns grow and increasing pressure is placed on the university to put those funds to work, that may yet change.

"Harvard has changed its financial aid policies, but some people will say, 'Anybody should be able to go to Harvard for free,'" Selingo said. "Needy students there still have grants and other aid beyond Harvard. They're not giving a free ride to every single needy student there."

Harvard's money managers are also frequent targets of criticism from alumni and other observers who say investors for a private, nonprofit organization should not be paid such large salaries. For the fiscal year ending June 2005, Jack Meyer, who was, at the time, HMC's chief, earned $6 million, while the Top 2 earners received $18 million and $16.9 million.

El-Erian was compensated $2.3 million for work between his appointment in October 2005 through June 30, 2006. The highest earner during fiscal year 2006 earned $2.9 million, according to Harvard.

These salaries are, nonetheless, below-market payouts for fund managers. El-Erian countered the criticism, saying that if Harvard were to manage the money externally, it would cost twice as much, and if it wants to do it more cheaply internally, it must be willing to pay a reasonable amount.

"It costs a lot less to manage a dollar internally than it does to manage a dollar externally," said El-Erian. "It's not a question as to whether we would pay, it's a question as to whether we would pay twice as much."