Harvard endowment loses 22%
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International Herald Tribune
Harvard endowment loses 22%
By Geraldine Fabrikant
Thursday, December 4, 2008

In a sign of the economic times, Harvard has sent a letter to its deans saying that the university's $36.9 billion endowment fund lost 22 percent of its value in the last four months and could decline as much as 30 percent by the end of the fiscal year on June 30.

Normally Harvard reports on the endowment's performance once a year, but the letter signed by the university's president, Drew Faust, and its executive vice president, Edward Forst, cited the "current extraordinary circumstances" as the rationale for providing an interim report.

Harvard depends on its endowment for about 35 percent of its operating budget, and some of its schools rely on endowment income to cover more than 50 percent of their expenses. As a result, the letter noted that the endowment's performance would have a significant impact on budgets. The decline, about $8 billion, does not capture the full extent of losses, the letter said, because some investments are harder to value and are valued only periodically.

For example, at the end of its fiscal 2008 year, Harvard said it had 11 percent of its holdings in private equity, 9 percent in timber and agriculture, and a comparable amount in real estate. Each sector has been hard hit in the current environment, but it is difficult to quantify the decline on a daily or monthly basis. Harvard noted that its private equity and real estate investments are managed externally. Experts say that those markdowns could prompt a decline of an additional three or four percentage points.

In addition, the Standard & Poor's 500-stock index was down again in November. At the end of fiscal 2008 in June, Harvard had 12 percent in domestic stocks and a similar amount in foreign equities as well as 10 percent in emerging markets. Declines in those sectors could also have affected the endowment's results.

At the end of fiscal 2008, Harvard said it planned to increase its private equity holdings by 2 percent. Instead, because of market turmoil and problems in the private equity market, the endowment has put $1.5 billion, about 38 percent of its private equity holdings, up for sale. But as many foundations and endowments do the same, it is unclear what such sales will fetch.

Jane Mendillo, who formerly ran the Wellesley endowment, assumed the head of Harvard's endowment in July. She was appointed in March, succeeding Mohamed El-Erian, a former managing director at Pacific Investment Management Company, who stayed two years before deciding to return to Pimco as a member of its senior management team.

Private equity funds have been a particular problem for nonprofit entities. They return cash periodically and require new cash commitments to finance ventures. But while there have been few returns, demands for new commitments have continued, which has put pressure on schools to come up with cash for an array of needs, including the school budget and private equity.

In their letter, Faust and Forst said that to have the cash necessary to meet demands and minimize risk, the school would issue "a substantial amount of new taxable fixed-rate debt." Harvard also plans to convert a significant amount of short-term tax-exempt debt into bonds with longer maturities, so it can reduce its exposure to volatility and continue to finance operations and other priorities.

The letter did not discuss the impact of the decline on the school's ambitious financial aid program. In December 2007, for example, Harvard said that as part of its program to attract applicants from different income groups, it would charge students from homes with incomes of $120,000 to $180,000 about 10 percent of their family household income per year, thereby subsidizing the $45,600 annual cost of attending.

A little more than half of its undergraduates receive some form of financial aid. At the time, the school said that the new plan meant Harvard would increase financial aid spending by the university to $120 million, from $98 million, annually.

Harvard, like other schools, is expected to be hurt by declines in other revenue streams, as well as the endowment. As families of students find themselves increasingly in need of financial aid, the revenue from tuition could fall.

In addition, as the downturn puts strain on the government, federal grants and contracts for sponsored research are likely to encounter added stress.

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