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Wednesday, February 11, 2009

More on Harvard's Endowment

It seems many endowments have put themselves in a difficult dilemma. In the quest for increased returns they have moved into more and more complex and difficult to monitor asset classes. In order to monitor such investments it would be logical to conclude that the endowments would need a larger and more highly skilled staff. Yet because of the investment losses caused because of these strategies the endowments are looking to reduce staffs. Logically it would follow that unless the endowments simplify their investment strategies they are setting themselves up for more unanticipared losses from poorly monitored or chosen investments in the future. Yet at least for Harvard (below) there is no mention of a change to a less complex investment strategy.

Harvard's Endowment, Beset by Losses, to Pare Its Staff


The Harvard endowment, stung by declines of more than 20% in recent months, says it will eliminate a quarter of its staff, or about 50 jobs, this year.

The largest college endowment in the U.S., Harvard finished its June 2008 fiscal year with a chart-topping 8.6% gain, bringing total assets to $36.9 billion. But like most endowments, it has stumbled badly in the months since. The university has said it is bracing for a 30% decline for the fiscal year ending June 2009.

At about 200 people, Harvard Management Co., which manages the endowment, has a much larger staff than most other endowments. That is because HMC portfolio managers invest about 30% of the funds themselves. At other endowments, including historically top-performing Yale, the staff picks outside managers to do the direct investing, and staff rarely run above 30 people.
[Mendillo, Jane]

"When we ... asked whether our company was appropriately sized and structured for the markets we operate in today, we concluded that the time was right for a significant rebalancing of our staff and our functions," Jane Mendillo, head of HMC, said in a statement.

A Harvard spokesman added that the staff cuts would include but weren't limited to the endowment's investment professionals.

Because of its size and strategy, Harvard is in many ways unique among endowments. Consultants said there isn't yet an industrywide trend of staff cutbacks.

But Daniel Jick, head of HighVista Strategies, said it wouldn't surprise him to see larger schools contract endowment staff in the months ahead, if only through attrition, as colleges try to trim costs wherever they can. His Boston-based firm manages endowment money, often for small schools that in effect outsource the task.

"Asset levels at endowments are down 25% to 35%," says Mr. Jick. "If you think of your investment costs as related to the size of your asset base, then your costs just went up."

Some alumni and faculty members for long have publicly criticized the seven-figure compensation packages paid to some Harvard endowment managers, which far exceed payouts to the university's deans or Nobel laureates. These detractors have urged the university to cut endowment staff and outsource asset management like most of its peers do.

For the most-recent academic year, HMC paid its top six managers $26.8 million. That figure reflects performance bonuses for the year ended in June, and HMC has said that compensation at this level is necessary to attract and retain talent.

Late last year, Harvard President Drew Gilpin Faust sent a letter to the school's deans warning that severe turmoil in global markets had led to an endowment decline of at least 22% from July 1 to Oct. 31, though the actual decline would likely be greater once estimates for private equity, real estate and other less-liquid assets were included.

The endowment declines would lead to budget cuts, the president indicated, and the school has sold $2.5 billion in bonds to raise additional funds.

a href="">The WSJ reports on staff cuts at Harvard Endowment

Perhaps a sign of the future comes from the wsj report that Harvard seems to have trimmed its equity allocation

* FEBRUARY 12, 2009

Harvard Endowment Cut Stock Holdings


Harvard University's endowment, the largest in higher education, cut by two-thirds its direct holdings of publicly traded stocks and funds during the market plunge in last year's fourth quarter.

As of Dec. 31, Harvard Management Co., which oversees the endowment, held about 70 stocks and publicly traded funds that were valued at $571 million, according to a filing with the Securities and Exchange Commission. Three months before, the endowment held about 200 stocks and other vehicles valued at just under $2.9 billion.....

The filing offers only a limited look at the Harvard endowment, valued at $36.9 billion as of June 30 and one of the nation's most closely watched investors, with a stellar long-term investment record. About 70% of the endowment is overseen by external managers, whose holdings on behalf of Harvard wouldn't be included in the filing.

In addition, publicly traded securities make up only a fraction of the endowment. Harvard recently said its goal was to have a third of the endowment in U.S. and foreign stocks, with the bulk of the rest in such assets as real estate, timber and private equity, which wouldn't appear in the SEC disclosure document.

Still, the filing could indicate shifts within the endowment, which fell at least 22% from July 1 through Oct. 31. Harvard has told the campus to brace for a loss of 30% in its endowment in the fiscal year ending June 30. The school has said it will have to undertake budget cuts.

In July, Jane Mendillo took over management of the endowment. Last week, the endowment said it would eliminate 50 jobs, or a quarter of its staff.

The endowments stock allocation has gone from 8% of the portfolio to .15% of the portfolio according to the article yet the asset allocation is for 33% stocks, Even leaving leeway from this number, something seems to be amiss.

It could well be that Harvard like other endowments is facing a "liquidity dilemma" related to their large allocation to alternative assets. Hedge funds and private equity have proven difficult to convert into cash to use for current expenditures forcing many universities to cut back on activities normally funded by their endowment. Additional evidence that this may be the case is that Harvard liquidated some of its private equity investments to third parties at prices reported to be as low as fifty cents on the dollar.

It seems quite likely that Harvard had to sell its most liquid investments: listed stocks to raise cash even if it caused them to be extremely underweighted in that asset class.

David Swensen, Yale's investment manager has written that endowments are "perpetual portfolios" and as such can ride out market swings and in fact would be in a position to buy asset classes when they are beaten down. In the most recent edition of Pioneering Portfolio management he writes of the quantitative techniques used to project possible large losses. He writes that Yale has a 5% probability of a decline which would be disruptive of university spending, (exactly what has occurred this year). It seems for Harvard and probably for others, not only has the decline impaired current spending it has also caused large deviations from asset allocation policy.

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