Harvard Endowment Reports 23% Gain for Fiscal Year

Correction Appended

The Harvard Management Company, which oversees the endowment of Harvard University, reported yesterday that the endowment had posted a 23 percent gain for the fiscal year ended June 30.

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Justin Ide/Harvard News
Mohamed A. El-Erian, chief of the company that oversees Harvard’s investments.
That brought the value of the nation’s largest university endowment to $34.9 billion. The endowment is overseen by Mohamed A. El-Erian, who formerly ran Pimco’s emerging market bond fund.

Together with other assets and related accounts, the total value at the end of June rose to $41 billion, from $33.5 billion a year ago. Its 22.4 percent total gain exceeded the Standard & Poor’s 500-stock index, which was up 20.6 percent for the same period.

The results reported yesterday came before problems with mortgage-related securities began to unsettle the markets in July and led to several hedge funds reporting substantial losses. In late July, one such fund, Sowood Capital Management, was forced to sell its portfolio and return $1.5 billion to investors. Harvard had invested $500 million with Sowood when it was started in 2004 by former Harvard managers.

Mr. El-Erian said in his letter yesterday that it appeared Sowood losses would account for a 1 percent decline in the fund, but that as a result of other investments that offset the loss, the endowment gained 0.4 percent in July. The Sowood loss is roughly $350 million.

Harvard’s performance is being closely watched not only by other endowments, but by money managers in general. For years under Jack R. Meyer, Harvard turned in strong performances, eclipsed only by Yale, under David Swensen. But Mr. Meyer left Harvard in 2005, and this is considered the first year that Mr. El-Erian is beginning to make his mark on the endowment.

Several specialists involved in the endowment world said that although Harvard’s figures were very good, they were perhaps not as stellar as what Yale is expected to report next month. Though few universities have reported, last week the University of Virginia said its endowment had returned 25.2 percent. That endowment has a value of $4.3 billion.

Like Yale, Harvard invests in a range of assets that include equities, real estate, commodities, private equity and hedge funds. It is an investment approach that is increasingly imitated by other endowments as well as wealthy individuals.

Still, “people want to turn this into the academic equivalent of a football game,” as one university investment officer put it. “But if you do well year after year, and avoid disasters, then the math is such that it will provide excellent results over the long term because of compounding.”

In an interview, Mr. El-Erian said that the biggest contributor to profit was the emerging markets investment, which last year accounted for 8 percent of the endowment, but rose 44 percent in value.

In the past Harvard has disclosed the gains of every asset group, but it is a sign of the growing competition in the market that it no longer gives those numbers.

A money manager close to Harvard noted that some people were concerned that Mr. El-Erian had not seen the Sowood loss coming because Sowood had a big stake in bonds and Mr. El-Erian’s expertise is in bond trading.

Asked about Sowood, Mr. El-Erian said that funds often require a multiyear lock-up. Though he declined to be specific, that raised the question of whether Harvard could have withdrawn its money before the Sowood loss, even if it wanted to.

He and others also said that Harvard had a successful investment in Denham, a commodities fund started by a former Sowood trader.

Though slightly less than half of Harvard’s assets are managed internally and the rest are run by outside managers, Mr. El-Erian has taken some money away from existing funds, including Highfields, a hedge fund run by a former Harvard trader, Jon Jacobson.

At least $2 billion is already being allocated to new managers.

Mr. El-Erian wrote that one of his goals was to emphasize risk management at a time when markets and investment strategies seem so interdependent that diversity might not always provide protection in a downturn.

For example, Mr. El-Erian said of Harvard’s current strategy, “When we entered the new fiscal year, we had hedges against the credit markets and the equity market. When the market sold off, we made money on the hedges. That helped offset the decline in the S.& P. and Sowood. That emphasis applies not so much to trading as to managing risk.”

A second less quantitative goal is to provide more transparency. Mr. El-Erian said the management company would start a Web site and its own annual report.

Correction: August 23, 2007

Because of an editing error, an article and headline in Business Day yesterday on the investment returns posted by the endowment of Harvard University misstated the return for fiscal 2007, which ended June 30. The return was 23 percent, not 22.4 percent. (The figure published in The Times did not take into account net distributions to the university.) The article also misstated the value of the University of Virginia endowment. It is $4.3 billion, not $880 million.