Why Harvard's $37B endowment is at risk of mediocrity

Alia Paavola -

In the last 10 years, Cambridge, Mass.-based Harvard University's endowment has grown by less than 2 percent, which places its position as the world's richest school at-risk, according to Bloomberg.

While Harvard's endowment growth has lagged, the university's rivals — Stanford (Calif.) University and New Haven, Conn.-based Yale University — have made record-crushing advancements. In the past decade Yale, currently the second-richest school in the world, increased its fund by 20 percent to a record $27.2 billion. Third-place Stanford's endowment rose 44 percent, in the same time period, to $24.8 billion.   

According to industry experts, while Harvard is dominant in many categories, it is "profoundly mediocre" with its investment strategy. Over the 10 year period, Harvard's average return on investment was 4.4 percent, which trails behind its peers. Stanford had an average ROI of 5.8 percent, while Yale posted a 6.6 percent return.

If the wealthiest endowments maintain their current investment returns, Yale's fund will outpace Harvard, claiming the title of world's richest school by 2032.

"If you’re able to outperform in a top quartile-way, you’re going to pull ahead — that’s just mathematics," endowment expert William Jarvis, now with U.S. Trust in New York, told Bloomberg. He recently left the Commonfund Institute, which works with nonprofits to enhance their investment strategies. "Compounding is so powerful," Mr. Jarvis added.

The division overseeing Harvard's endowment has recognized the university's investment shortfall. In 2015, the division commissioned a report that found Yale could beat out Harvard within the next two decades. According to Bloomberg the internal report quoted anonymous employees complaining that Harvard's endowment "descended into mediocrity because of easy-to-beat internal benchmarks."

Harvard's Ivy League peers are making up ground by tapping outside fund managers for each asset; whereas Harvard maintained an internal trading desk and invested more in real estate and timberland.

Even though Harvard Management Co. — which controls the endowment — replaced its president and CEO in December 2016 in hopes of improving investment returns, Harvard's annual gain for the year ended was the worst among the wealthiest endowments. Harvard's gain was 8.1 percent, while Yale's endowment increased 11.3 percent and Stanford's grew 13.1 percent.

"Our performance is disappointing and not where it needs to be," Harvard Management Co. President N.P Narvekar and CEO wrote in Harvard's annual report this year, according to Bloomberg.

While Harvard's investment strategy lagged behind its peers in the past decade, Harvard is still a prolific fundraiser — collecting $6.2 billion in gifts between 2008 and 2016 and funneling 2.4 billion into the endowment.  

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