Even rich Harvard strained by global market downturn

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

Diversification has protected Harvard from past market declines because there were always certain asset classes, such as oil, timber and gas, that thrived even when stocks and bonds crashed, said David Scudder, chairman of Aureus Asset Management in Boston, who was a vice president at HMC from 1999 through 2005.

But now, losses are piling up across virtually all asset classes.

“The principle of diversification is still working to cushion a part of the decline, but not to the same degree that it did five or six or seven years ago,” Scudder said.

Harvard’s latest report, in September, showed an 8.6 percent return for the year ending June 30, compared with a negative 13.1 percent return for the Standard and Poor’s (SandP) 500 Index. But Harvard won’t say how it has performed in the period since June 30, during which the SandP is down an additional 28 percent.

What is public from the last report is Harvard’s asset allocation targets: 11 percent each in domestic, foreign and emerging market equities; 26 percent in real assets like timber and real estate; and 11 percent each in bonds and private equity.

Those figures do little to show just how hard Harvard will ultimately be hit. Some investments, like bonds, have been battered by the mortgage crisis, but others have not; some are even hedged against a downturn in real estate and may have gone way up.

Sedlacek said the scale of any losses — particularly from unconventional investments — is impossible to predict, but he expects Harvard will still perform better than most universities.

Similarly, Scudder said he wasn’t aware of any risky investments he thought Harvard would come to regret. Nor did he think recent events undermined Harvard’s long-term strategy of diversification.

Other colleges have been more specific on their recent losses; Amherst, for instance, has said its endowment is down 25 percent.

Seventy-six institutions last year reported endowments of $1 billion or more, but that number will certainly fall.

For the wealthiest institutions, their strength is also a vulnerability: While most schools rely almost entirely on tuition or state funds, Harvard gets one-third of its budget from endowment earnings.

Faust noted that the endowment isn’t the only financial issue facing Harvard. She noted that “donors and foundations will be harder pressed to support our activities,” while federal grants could also dry up.

Associated Press writer Rachel Beck contributed to this story.

(Associated Press)