Harvard Endowment Loses Value but Beats Benchmark

The $30.7 billion fund took a beating on emerging market equities, but solidly outperformed its real assets benchmark. 

(September 27, 2012) – The world’s largest university endowment lost 0.05% of its value over the 2012 fiscal year, totaling $30.7 billion when the books closed June 30. 

Last year, Harvard’s endowment fund returned 21.4%, led by gains of 34.6% in its domestic equities portfolio. 

“This is a time of unusual turbulence with significant macroeconomic issues facing regions around the world,” Jane Mendillo, the endowment’s president and chief investment officer, said in the returns report. “While future returns may be uncertain, our strategy is to remain well diversified and focused on long-term value creation. We continue to concentrate on generating alpha on both a domestic and international stage.” 

The fund’s most dramatic result for the year came in its emerging markets equities portfolio, which lost 17.43% of its value. This was an even steeper decline than the benchmark’s 15.95% loss. The report acknowledged the divergent performances of its domestic and emerging market equities assets, but maintained that despite the losses in 2012, Harvard will stay the course with its stock strategy. 

“We should note that Harvard carries relatively more exposure to both foreign and emerging markets than many of our peers,” the report says. “Our portfolio has roughly equal allocations to US, international developed, and emerging markets equities. The difference in returns among these markets was dramatic over the last twelve months,” it continues, “but we remain convinced that active investing in emerging and international markets is not only wise, but imperative over the long-term…If chosen and executed well, emerging markets investments are poised to benefit from the phenomenal rate of change in local, regional, and global businesses worldwide and will be one of the key drivers of our portfolio’s future performance.” 

Domestic equities and fixed income were two bright spots, posting gains of 9.65% and 7.95%, respectively. Of course, both of these asset classes performed well for the markets as a whole. 

Harvard did beat its overall benchmark by 98 basis points, buoyed by 3.23% gains in its real assets holdings, versus the benchmark’s 1.55%. Real assets—natural resources, real estate and publically-traded commodities—make up a quarter of the endowment. 

Real estate, was one of the strongest performers in the funds entire portfolio, adding 8% over the year. “Historically HMC’s [Harvard Management Company’s] real estate strategy was focused exclusively on investments in private-equity-style real estate funds run by third-party managers,” the report says. “We are now investing a significant portion of our new capital in real estate through a direct deal/joint venture approach in specific market niches. This provides HMC much more discretion over capital allocation across markets and sectors, leverage, and development risk, as well as lower management fees.”