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Harvard endowment's 2% loss magnifies decade of struggle

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Harvard University's endowment, searching for new leadership amid a year of turmoil, reported a 2 per cent annual investment loss, magnifying a decade of lacklustre returns compared with the school's elite rivals.

[BOSTON] Harvard University's endowment, searching for new leadership amid a year of turmoil, reported a 2 per cent annual investment loss, magnifying a decade of lacklustre returns compared with the school's elite rivals.

The world's biggest college fund shrunk by US$1.9 billion, to US$35.7 billion after also accounting for ever-expanding spending on buildings, scholarships and research. Harvard blamed the outsize loss, for the year ended June 30, primarily on poor investments in stocks as well as natural-resource holdings in South America.

"This has been a challenging year for endowments and clearly these are disappointing results," Paul Finnegan, a private-equity investor who chairs the board overseeing Harvard's endowment, said in a statement today.

Harvard's endowment chief, Stephen Blyth, a former Deutsche Bank bond trader, left in July after only 18 months on the job, and the board is now conducting the fourth search for a new leader since 2005. The board met today to consider two finalists for the job, NP 'Narv' Narvekar, head of Columbia University's endowment, and Amy Falls from Rockefeller University who also sits on Harvard's investment committee, according to people familiar with the matter.

Harvard's latest annual return, its worst since the financial crisis, trailed an old-fashioned mix of 60 per cent US stocks and 40 per cent bonds, which would have gained 5 per cent, according to the school. Many colleges have yet to report this year's returns.

The Massachusetts Institute of Technology eked out a small gain, as did Wake Forest University in North Carolina. The University of Pennsylvania lost 1.4 per cent.

Harvard's long-term record, once the envy of the endowment world, has been damaged. The university reported an average annual return of 5.7 per cent over the last decade. The 60-40 US stock-and-bond mix would would have returned 6.9 per cent a year. 

Over the last decade, MIT, Harvard's neighbour in Cambridge, Massachusetts, boasts an 8.3 per cent a year on its endowment of US$13.2 billion. Harvard has lagged even while paying top endowment executives more than any other school. Former CEO Jane Mendillo was paid US$13.8 million in 2014, compared with US$1.6 million for Seth Alexander, the endowment chief at MIT.

Harvard's rivals tend to follow a model pioneered by top-performing Yale - which hasn't reported results yet - of farming out funds to outside managers, a strategy the school might consider under a new leader. Harvard has a staff of more than 200 that manages money in-house.

"For them to have this kind negative return is serious," said Charles Skorina, an executive recruiter for endowments and foundations based in San Francisco. "Year after year after year they under-perform."

In part, Harvard blamed poor stock-picking for the most recent annual result, which also trailed an internal benchmark. The university's portfolio of publicly-traded stocks lost 10.2 per cent. A report from Robert Ettl, interim chief executive officer, blamed stock picks from outside managers, especially in the health-care sector.

The endowment eliminated at least a dozen positions and dismantled a public-equity trading team earlier this year amid reports of steep losses. Mr Ettl said in the report the school planned to hire a new head of "absolute return," which focuses on hedge funds, and publicly traded stocks, replacing Michael Ryan, a former Goldman Sachs Group partner who was among this year's many departures.

Natural resources - long a focus at the endowment - also lost 10.2 per cent, largely the result of "two assets in South America," including one experiencing a "severe drought during the crop season." Mr Ettl said the school had since "refined our strategy to emphasise deeper relationships with external managers." The school also hired a new head of the natural resources portfolio with agriculture and timber experience.

The university's top-performing asset class was real estate, which rose 13.8 per cent. Private equity gained only 2.6 per cent while absolute return lost 1.2 per cent.

Harvard said it fared better over 20 years, returning 10.4 per cent annually, outperforming the yardsticks it uses to measure its performance.

The endowment generated US$1.7 billion for university operations this past year, more than one-third of the school's revenue. It transferred more than US$25 billion since the management company for the endowment was established in 1974, "enabling industry-leading financial aid programs, groundbreaking discoveries in scientific research, and hundreds of professorships across a wide range of academic fields," Mr Ettl said in the report.