What they don’t teach about cash at Harvard
The world’s richest university has seen its investments slump by $11bn
The quiet of Harvard Yard, the centre of Boston’s famous university, was shattered last week by protesters waving placards and wielding megaphones.
Tourists trying to get their photo taken with the statue of founder John Harvard contended with angry university staff railing against proposals to cut 275 jobs. “Watch out, this is just the beginning,” warned Geoff Carens, a library assistant and protest organiser.
As the world’s richest university wrestles with the hangover of a high-risk investment spree that has wiped $11 billion (£6.6 billion) off its fortunes in the past year, more cuts are coming, he said. This is unlikely to be the last time voices are raised. Staff will not go quietly, said Carens. Future protests would involve “direct action” and be “a lot more dramatic”.
The demonstration was the latest embarrassment at Harvard, which is expected to confirm a 30% fall in its endowment for its 2009 financial year, which ends on Tuesday.
Staff expecting more cuts accuse Drew Faust, its president, of being more concerned with investment returns than academic excellence. Others have identified a more incendiary target: Larry Summers, one of President Barack Obama’s top financial advisers, who was Harvard president between 2001 and 2006.
Harvard’s endowment, a collection of funds made up from donations from alumni, funded about a third of Harvard’s operating budget in 2008. This year’s loss is the biggest in 40 years and the impact is being felt across the campus.
Salaries have been frozen, the divinity school has warned it may not be able to cover tuition for all its students and the university has been forced to add to its debt by issuing $1.5 billion in new bonds, its largest such offering – a sharp reversal of fortune for a fund that was once held up as a model of investment strategy.
Harvard’s endowment stood at $37 billion on June 30 last year, built up from a record run after the university’s fund-management arm made big bets on everything from private equity and property to timber and commodities. Now some of those risky bets have come dramatically unstuck.
The endowment is expected to have fallen to almost $25 billion by the end of the month and the always present tensions between the academics and Harvard Management Company (HMC), the subsidiary that invests the university’s money, are at boiling point.
And that is despite a donation of $100m from David Rockerfeller Sr last year, topped by a $125m gift from Hansjörg Wyss, Switzerland’s second-richest man, in October.
“Harvard has become an investment bank with a university attached,” said Carens. “When I came to Harvard the endowment was $4.5 billion. Now by most estimates it is $25 billion. Harvard has lost some money but they don’t need to lay anybody off. If they need to, they should chop at the top. Cut the salaries of the five or six people who manage the Harvard endowment – they get paid between $2m and $6.4m a year.”
In the 15 years before this year’s fall, Harvard returned an annual 15.7% against 9.2% for the Standard & Poor’s index. Until 2005 HMC was presided over for 16 years by investment guru Jack Meyer, but since his exit in 2005 HMC has gone through staff at an alarming rate, including five chiefs in four years. Last week saw the departure of Marc Seidner, head of fixed income.
New boss Jane Mendillo, 50, came to Harvard last July after running Wellesley College’s far smaller endowment. “I think all investors have had a lesson in how fast and how far the markets can move,” she said in a recent interview.
One alumnus, now a senior financial figure, said Mendillo faced a tough task but could not be blamed for the mess. He said that under Summers, now director of the White House’s National Economic Council, Harvard had given big tuition discounts, started an ambitious building programme and failed to spot the long-term risks being taken by HMC.
“They wanted the best students at any cost. They were giving away tuition dollars in the hope of making it up on the endowment. Summers was responsible for that decision. A lot of people are scared stiff that he is going to do for the American economy what he did for Harvard University,” he said.
Others are more generous. Peter Miralles, president of Atlanta Wealth Consultants, said: “What you are seeing is a reaction to a market environment. They were very early in using multiple asset classes, alternative investments, private equity, commodities. But last year you had a total melt-down in almost every asset class.” Inevitably, he said, in this environment donors were less likely to be generous to Harvard, worsening its position.
Over the long term, though, he said HMC had proved a good manager and would be so again. “The big question is, is using multiple asset classes going to work. The answer is yes,” he said.
Harvard was not alone in being caught out by the credit crunch. “The world changed so quickly on September 15 (the day Lehman Brothers filed for bankruptcy), you had to take a lot of actions very quickly,” said one senior fund manager.
What he said was more troubling was Harvard’s reaction to the crisis. “If you looked at the numbers coming out of the endowment world for the fourth quarter of 2008 they all looked the same. Yale, Princeton, Harvard, it didn’t make a difference.” But after the crisis Harvard panicked and starting selling assets. At Yale, Harvard’s arch rival, the “rhetoric was very different”, he said.
The fund manager said David Swensen, Yale’s chief investment officer, had taken a different tack. The fund manager said: “The important thing is to stay in the trade. Those who stayed in caught the bounce, especially in emerging markets. Others like Harvard, I think, started selling like crazy."
Matters were made worse, the fund manager said, by a badly-timed bet on interest rates – which collapsed after Lehman – and the decision to cut risk insurance that had been put in place by Meyer’s successor, Mohamed El-Erian, now co-chief executive of the bond giant Pimco.
Harvard would not comment on investment strategy, but Harvard watchers on Wall Street said El-Erian’s insurance had allowed the endowment to ride out some of the turbulence before Lehman’s collapse. As the crisis worsened, HMC had lost its cushion and its nerve. “If you are down 20% or 30%, the human reaction is to sell when really you should be buying,” said one fund manager.
One of Mendillo’s first moves at HMC was to sell between $1 billion and $1.5 billion of Harvard’s private-equity assets, at a substantial loss. Even after the sale, the endowment still has big private-equity commitments it has yet to pay.
And the people who are paying for the losses are the university staff, said Carens. “These people (at HMC) have made fortunes losing money for the endowment. Now they want us to foot the bill.”
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