Harvard University’s $40.9 billion endowment plans to boost investments in buyout funds and venture capital—alternative assets that can produce higher returns but are riskier because they’re more illiquid than stocks and bonds.
N.P. “Narv” Narvekar, chief executive officer of Harvard Management, which runs the endowment, wrote in the university’s annual report published Thursday that the fund’s “allocation to buyouts, growth and venture capital continues to be low relative to what likely makes sense for Harvard.’’
Narvekar said he considered boosting investments in private equity when he joined the endowment in 2016, but high valuations were a deterrent. The endowment now is “early in the process of making this allocation transition,’’ he said. He didn’t name specific funds or sectors.
Many college endowments have moved out of U.S. stocks during the bull run of the past decade and into alternative investments in the pursuit of even higher returns. Yale University’s endowment, for instance, is reducing its target allocation for domestic equities to 2.75% for 2020 in favor of investments in venture capital and leveraged buyouts.
Narvekar said it takes seven to nine years “to attain a meaningfully higher allocation to private equity in a prudent manner,” and that Harvard’s move will have a “multiyear’’ time frame.
Private equity, which made up 20% of Harvard’s portfolio in fiscal 2019, was the fund’s best-performing asset class, gaining 16%, according to the report. A larger investment in venture capital would have resulted in a “significantly higher return’’ for the endowment, he said. He noted that some of the big initial public offerings this year were backed by venture funds with vintage years from 2008 to 2013. “Harvard did not participate in those funds in that era,’’ he said.
Narvekar said that some types of private equity are a better source of returns “than some of the other higher-risk illiquid assets currently in the portfolio.’’
One of those higher-risk illiquid assets has weighed down performance for years: natural resources. The sector was Harvard’s worst performer in the fiscal year, losing 12.4%. “Another portfolio goal was to reduce our exposure to natural resources,’’ Narvekar wrote. “We are obviously disappointed with persistent negative returns in this legacy part of our portfolio.’’
Narvekar arrived at Harvard in December 2016 to revamp the endowment’s operations and improve performance. Harvard Management has either sold or written down some of its natural-resources holdings. Those investments include assets it directly owns and ranges from eucalyptus plantations in Uruguay to farmland in Brazil.
Natural resources are now about 4% of the portfolio, down from 9% since Narvekar became CEO of Harvard Management, he said. The fund wrote down about $1 billion of natural-resources investments in fiscal 2017 and has sold more than $1.1 billion of these assets, he said. Its natural-resources assets were valued at $1.9 billion in fiscal 2019, down from $2.2 billion the prior year, according to the report.
However, the performance of some of the assets “still weighs on the overall performance of the natural resources portfolio,’’ Narvekar said.
Real estate was the fund’s second-best performing asset class after private equity, returning 9.3%. Harvard Management outsourced the real estate team to Bain Capital in 2018, and a portion of the portfolio continues to be managed by the same group.
Hedge funds were the largest asset class at 33% of the portfolio, with a gain of 5.5%, while public equities made up 26% and posted a 5.9% gain. Public equities and the bulk of the fund’s hedge fund position are the most liquid portions of the endowment—only 20% of the hedge funds are illiquid. The value of hedge funds in the portfolio rose to $14.6 billion in fiscal 2019 from $12.8 billion in the previous year.
Many hedge funds have had disappointing performance in the past decade, and investors have complained about high fees. Narvekar said he was “particularly pleased” with the returns of the fund’s more liquid hedge funds since the illiquid ones have been a “drag on performance.”
Harvard’s endowment gained 6.5% in the 12 months through June 30, 2019, outpacing the 4.9% median gain for college endowments tracked by investment firm Cambridge Associates. But Harvard and many college endowments have missed the stock-market rally. In the same period, the S&P 500 index returned 10.4%, while a 70/30 mix of U.S. stocks and bonds grew 9%.
Four of Harvard’s Ivy League peers—Yale, Princeton, Cornell, and Columbia universities—failed to crack a 6.5% return. The only market beater among the eight Ivies was Brown University, which posted a 12.4% gain in fiscal 2019.
“While we are not pleased with this performance, we are mindful that HMC is an organization in the midst of significant restructuring,’’ Narvekar said about the fiscal 2019 return, adding that the endowment is now at about the halfway point in its five-year plan. Narvekar has the backing of Harvard officials, who are “very supportive of the constant, painstaking progress in restructuring the endowment portfolio,’’ Vice President for Finance Thomas J. Hollister and Treasurer Paul J. Finnegan wrote.
According to the annual report, the university’s revenue rose 6% to $5.5 billion. Operating surplus was $298 million, compared with $196 million in fiscal 2018. Net assets rose almost 5% to $49.3 billion, driven by endowment investment returns, contributions, and “a disciplined focus on financial management.’’
Harvard continues to dominate in fundraising. It raised $1.37 billion in fiscal 2019, slightly below $1.42 billion in the prior year. A five-year capital campaign that concluded in June 2018 totaled $9.6 billion, the most ever raised in higher education.
Source: Barron’s