The manager of Harvard’s $US37 billion is warning about “potentially frothy markets.”
On Tuesday, Harvard released the results of its endowment for fiscal 2015, which saw the endowment return 5.8% through June 30 and grow to $US37.6 billion, an all-time high. (On an inflation-adjusted basis, the endowment is still below is 2008 high.)
In the endowment’s annual report, Stephen Blyth, the CEO of Harvard Management Company which manages the endowment, struck a note of caution, however, writing that the current market condition presents “various challenges to investors.”
Given the size of Harvard’s endowment, the fund has access to just about any type of asset you can dream up: stocks, bonds, venture capital, private equity, obscure derivatives products, and so on.
But in the wake of the 2008 financial crisis where the endowment took major losses and faced a serious liquidity crunch, Blyth noted that the fund is taking a more careful approach to investments that could prove illiquid in the future.
What Blyth means is that if the endowment needs cash in the future as markets turn down or university expenses increase, it’s important to have enough invested in assets that can be easily sold without taking a debilitating loss.
Notably, Blyth addressed valuations in Silicon Valley, which poses a particular type of liquidity risk. Because if say you invested $US10 million in a startup and got get 10% of the company two years ago, it doesn’t mean that if the company is now valued at $US1 billion you can just take out the $US100 million that, on paper, your position is now worth.
Blyth wrote (emphasis added):
The debate about highly-valued assets continues to get louder: private equity valuations are now, on average, at higher levels than in 2007. There are over eighty “unicorns” (venture-capital portfolio companies with valuations over $US1 billion), as many as in the last three years combined. Venture capital continues to receive ample funding, and private company valuations are also bolstered by public mutual funds entering late stage funding rounds in significant size. This environment is likely to result in lower future returns than in the recent past.
We are proceeding with caution in several areas of the portfolio: many of our absolute return managers are accumulating increasing amounts of cash; we are being careful about not over-committing into illiquid investments in potentially frothy markets, while still ensuring we will be involved if market dislocations arise; and we are being particularly discriminating about underwriting and return assumptions given current valuations.
Blyth also referenced liquidity issues as it relates to larger markets like US stocks and Treasuries, both of which have seen large swings at times over the last year, moves Blyth chalked up to a, “new regulatory regime that has shrunk balance sheets and reduced risk appetite.”
And so it’s interesting to see a portfolio manager who could do just about anything with a lot of money write that almost anything he does with the money poses risks and that right now, the most desirable goal for the fund is to simply maintain future flexibility.
Here’s the breakdown of the endowment’s 2015 return.
And the chart of the endowment’s growth over time.
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