Harvard announced that its endowment is down 22% from June through October. This drastically understates the losses to date, because November was awful, Harvard has yet to hear from some third-party managers, and–our guess–many of the fund’s private-equity, venture-capital, and other private investments have likely not yet been marked to market.
The school is reacting by cutting expenses and slowing expenditures. The endowment is also repositioning itself to take less risk. This will continue to put pressure on private equity and venture capital allocations.
AP: Harvard officials say that the university’s largest-in-the-nation endowment lost about 22 per cent of its value, or $8 billion, in the four months since the end of the last fiscal year.
The endowment was worth $36.9 billion as of June 30, the end of its fiscal year. The school has said its American stock portfolio and foreign equity portfolio had taken hard hits recently.
Harvard will have to take a “hard look at hiring, staffing levels, and compensation,” the university president Drew Faust and the executive vice president Edward Forst wrote in a letter informing deans of the losses.
They say the university should plan for a 30 per cent drop in endowment value by the end of next June.
Or, more likely, now.
The decline, which amounts to more than $8 billion, is larger than the endowments of all but four other universities—Yale, Princeton, Stanford, and MIT. In the same period, the S&P 500 fell 24.6 per cent. The index has fallen an additional 12.4 per cent since then…
Yesterday’s figure dwarfs Harvard’s worst single-year endowment loss of 12.2 per cent in 1974. The endowment has clocked only three years of negative returns, all under three per cent, in the subsequent three decades.
Forst said University leaders have delayed setting the endowment payout rate for the next fiscal year—a figure generally announced the December before—until Harvard’s schools can reevaluate their budgets.
“Given the extreme volatility in the markets, I don’t expect [the payout rate] will be set until we have a much more concrete sense about financial plans and endowment performance,” Forst said.
Yesterday’s letter did state that University leaders expect to spend a higher percentage of the endowment next year in an effort to buffer the immediate impact of the losses.
The letter also stressed the possibility of slowing construction projects or reevaluating “staffing levels,” and Forst confirmed that the University will reevaluate the scope and pace of every major capital program—including Allston expansion plans and House renovations at the College.
“We expect that every part of the University is going to have to find ways to reduce its operating expenses,” Forst said.
The need for budget reductions could have particular impact on employee salaries and benefits, which make up half of the University’s costs, according to yesterday’s letter.
Forst would not say whether more hiring freezes would follow last week’s freeze in the Faculty of Arts and Sciences, but said individual schools will need to “take a hard look at compensation generally.”
The central administration will work closely with leaders at the schools to tailor solutions to their individual circumstances, Forst said, adding that Faust convened a two-hour meeting yesterday morning to discuss the latest financial update with the deans.
“Obviously, no one is happy with the endowment being down,” FAS Dean Michael D. Smith wrote in an e-mail to The Crimson yesterday, “but it does help out planning efforts to understand where the portion of the endowment that we can measure stands.”
While the schools struggle to budget for this new development, Harvard’s money managers plan to increase the University’s financial flexibility by upping cash holdings and reducing the amount of risk in the endowment portfolio.
Leveraging its strong credit ratings—the highest granted by rating agencies Moody’s and Standard & Poor’s—Harvard will issue new taxable fixed-rate debt. Unlike tax-free debt, these bonds can be used for any University expenditure and thus increase Harvard’s cash flexibility, Forst said.
The University will also convert existing short-term tax-exempt debt into bonds with longer maturities, allowing the University to postpone short-term payments to debt holders and retain a larger financial cushion to the volatility in the credit markets.
Multiple media outlets recently reported that Harvard was also seeking to shore up endowment holdings by selling $1.5 billion of its private equity portfolio at a drastically reduced price, but Forst declined to address those reports yesterday.
Harvard Endowment Blows Up