How the Smart Get Richer: Harvard University Endowment Fund

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Sep 18, 2008
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As the bear market deepens success stories are getting harder to find. So a few eyebrows were raised when a Massachusetts fund recently announced it posted an 8.6% return over the past twelve months. Hours away from Wall Street, this fund masterfully uses a basic investment strategy that many of us have forgotten about.

This fund has trounced the returns of all-star money managers over the same period, beating most of the greats including Warren Buffett, Ken Heebner, Bill Miller, Bruce Berkowitz, Marty Whitman, and T. Boone Pickens.

The fund, which is the Harvard University Endowment Fund (HUEF), earned 8.6% the past year while the stock market plunged into bear territory. This type of return has become the norm at HUEF. Over the last decade it has achieved an average annualized return of 13.8%.

The fund has come a long way from when it started in 1636. That year, the annual income from the fund was $300. Thanks to years of steady market-beating returns the fund now sits at more than $36 billion. It’s America ’s largest educational fund. If Harvard got the urge, it could treat every American citizen to a movie and medium popcorn.


But Harvard is not going to do that. In fact, the Harvard Alumni for Social Action (HASA) has been pressuring Harvard to spend some of its growing war chest on charitable causes, but Harvard has shown no appetite for that either (“you wouldn’t ask a museum to fund cancer research,” is the general tone of the response).

Approximately 30% of the Harvard’s operating budget comes from the endowment. The university spends about 4% of it, $1.4 billion, each year. It would only take an extra 1.5% payout from the HUEF to pay the $32,000 tuition bills for the entire student body.

But Harvard is not going to do that either. Why block a healthy revenue stream?

Harvard can do what they want with their money. It’s not our business. But it is instructive to figure out how they made it. And to be honest, what they did was fairly simple.

The best way to understand the HUEF is to strip away the lofty ideals about the “search for enlightenment” and simply look at it as an aggressively managed fund that is genetically programmed to eat and grow fatter.

A part of its success has to be chalked up to “Fiscal Darwinism.” Harvard is an elite university. It attracts the best and brightest students. They tend to perform well financially - and therefore are in a position to donate more to their Alma Mater. Natural evolution.

A bigger part of the story is they have hired disciplined managers. Jack Meyer ran it from 1990 to 2005 growing the endowment from $4.8 billion to $25.9 billion. Then they lured superstar bond trader Mohamed A. El-Erian from Pacific Investment Management Corporation (PIMCO). He stuck around for about a year, generating a healthy return of 23%, and then went back to PIMCO.

On July 1 last year, just weeks before the credit crisis started to take hold, Jane Mendillo took over. The former chief investment officer at Wellesley College , Mendillo is part of a growing group of female elite-money managers (6 of the 24 largest US endowments are run by women).

At first glance, HUEF’s healthy 2008 fiscal return of 8.6% suggest that they are doing a good job of picking stocks. That isn’t quite right though. Their U.S. equity holdings lost 12.7%, and the foreign equities lost 12.1%.

So this is not a story about smart people hiring superstar stock pickers. Harvard’s success this year is largely a result of its asset allocation.

The fund managers figured out stocks should only be a small part of its portfolio. Only 12% of the fund was invested in U.S. stocks and 21% in foreign equities. So, even though this part of their portfolio is down, it’s not enough to cancel out the positive returns generated elsewhere.

The endowment’s bond portfolio (about 9% of the total fund) performed extremely well. Domestic bonds earned the fund 16.1% and foreign bonds rocketed to 21.3%.


Approximately 32% of the Harvard endowment is invested in “real assets” which includes commodities as well as timber land, agricultural land and real estate. They bet heavy on this sector and these “real assets” earned excellent returns of 35.8%.

Harvard manages about 30% of its money internally. The rest of the portfolio is managed by a matrix of fund managers, all with different skill sets and philosophies, but serving the same objectives: To protect and grow the assets of the fund.

The historical performance of the Harvard Endowment proves that asset allocation is a vitally important component of any investing strategy. As you can see in the chart above, HUEF is evenly distributed across many asset classes. That way it can catch a big run wherever the bull is winning. Over the past year that has been commodities.

Harvard University is an American Institution. Perhaps they foresaw saw the market panic. Or maybe they didn’t. But they were strategically diversified to benefit from a big upswing (commodities) and to limit damage from a major downturn in another sector (financial stocks).

make money, not war,

Guy Bennett

President, Q1 Publishing

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