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Even rich Harvard strained by global market downturn

Associated Press | 11/19/2008, 3:50 a.m.

PROVIDENCE, R.I. — You know the financial meltdown is bad when even Harvard University is feeling the pinch.

Harvard — America’s oldest university and the world’s wealthiest — helped pioneer a model of diversified endowment investing that many colleges have copied, branching into exotic investments like timber and private equity. When most schools were sticking with stocks and bonds, Harvard was buying forests in Maine and slices of startup companies financed with venture capital.

Now, the question is whether those practices have cushioned — or worsened — the blow from the latest downturn.

Harvard’s endowment was worth a staggering $37 billion as of last year — a sum so big that members of Congress accused the Ivy League school and others of hoarding their riches and pressured them to share more with students.

The university has refused to say exactly how much it lost in the meltdown. But Moody’s Investors Service has projected losses of 30 percent for college and university endowments overall this year. If that were applied to Harvard, it would mean a drop of $11 billion.

Harvard President Drew Gilpin Faust, in an e-mail Monday to faculty, staff and students, warned only of “unprecedented endowment losses” and said the school is looking at ways to cut spending.

“We have to think not just about what more we might wish to do, but what we might do at a different pace or do without,” she said.

Among other things, she said, Harvard will review compensation costs and the school’s ambitious plans to expand across the Charles River. But she said the university intends to push ahead with an expansion of financial aid that will ensure that families with incomes below $60,000 will pay nothing to send their children to Harvard.

Other elite schools are also warning of tight times ahead.

Fellow Ivy Leaguers Brown and Cornell have frozen some hiring and are either delaying construction or reviewing budgets to see which projects can be put off. Amherst and Williams are scaling back construction projects to brace for a slowdown in giving and more requests for financial aid. Stanford is slashing its budget by $45 million.

Harvard Management Co. (HMC), which oversees the endowment, is legendary in investment circles, with an investment strategy that has produced big returns for the university. Over the past 10 years, Harvard investments earned a remarkable 13.8 percent annually, or two to three times better than the stock market overall.

“It’s really outperformed almost every other university out there over the long run,” said Verne Sedlacek, former chief financial officer of the HMC and current president and chief executive of CommonFund, a nonprofit that advises universities on investments. “They get access to very good managers because they’re Harvard.”

But equally important has been HMC’s knack for eking out decent returns in years when everyone else has big losses, like in 2002, when endowments fell 6 percent on average and Harvard lost just 2.7 percent. The university has cited HMC’s record of hedging against losses in down markets to justify bonuses of as much as $35 million for its money managers — payouts that have angered some alumni.