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Letters | 7 Ware Street

Mum’s the Word

January-February 2023

In october, when the University reported financial results for fiscal year 2022, it introduced a surprise. Alongside news of a huge budget surplus, Harvard Management Company (HMC) significantly reduced the information it provides about the composition of and investment returns on endowment assets (see harvardmag.com/endowment-decline-22, and in this issue). Those returns are the largest source of funds for Harvard’s teaching and research, so having some sense of what’s there matters.

Through fiscal 2021, HMC disclosed the share of assets invested in public equity, private equity, hedge funds, and so on (that year, 14 percent, 34 percent, and 33 percent, respectively), and the investment return for each class (50 percent, 77 percent, and 16 percent—on the way to an aggregate return of 33.6 percent, the best results since 1983).

As N.P. Narvekar, HMC’s chief executive since late 2016, wrote about fiscal 2021, “For each of the last three fiscal years, asset allocation/risk level was a significant determinant of returns—the higher the risk taken, the higher the return generated”—i.e., it paid to own equities. That statement was, in part, defensive: gaudy as HMC’s results were, peer institutions reported returns in excess of 40 percent (MIT: 55.5 percent), reflecting even greater earlier commitments to private equity. Asset allocation mattered.

It matters even more now. After much study, Narvekar noted this October, HMC and the University have reached agreement on Harvard’s overall risk tolerance—resulting in the decision to take on still more equity exposure.

Moreover, as he noted, amid the tumultuous market conditions since last spring (as inflation increased and interest rates began rising rapidly), valuations reported for private assets may lag considerably behind current realities. That raises the specter of depressed returns in fiscal 2023 and beyond for key parts of the entire endowment: exactly when transparency matters most.

The decision to curtail disclosure was explained thus: “HMC’s transition in recent years from siloed investment teams to a generalist investment model, where the vast majority of the endowment is invested through external managers, made simplified allocation reporting increasingly arbitrary. Individual investments can straddle multiple asset classes and HMC wants to avoid reporting with false precision.” In other words, HMC is a different organization, and complex investment vehicles muddle the reporting categories: private equity, for example, includes leveraged buyouts, venture capital, and other assets; and hedge funds are wildly heterogeneous.

Do those rationales stand up? Although HMC is now run by a small cohort of generalist investment professionals, they and the HMC board surely think about the risks and returns associated with various assets. Narvekar’s (timely) decision to reduce real-estate exposure, for example, was predicated on a view about prospective returns. And his truncated report this year is explicitly couched in just such categories as he explained that “our benchmark relative performance with respect to public equities, hedge funds, and private equities” was less robust in fiscal 2022 than in the prior four years.

As for concerns about “false precision,” note that the annual financial report footnotes $58.762 billion worth of assets precisely divided among more than a dozen classes (cash, domestic equity, foreign equity, global equity, hedge funds, private equity, natural resources, real estate, and so on) in detail sufficient to satisfy auditors PricewaterhouseCoopers. Smart HMC employees are developing metrics on the carbon content of investments (en route to “net-zero” greenhouse-gas emissions for endowment holdings by 2050; see harvardmag.com/hmc-fossilfuel-net0update-21)—an extraordinarily complex task. Surely they could devise more accurate ways of reporting on, you know, HMC’s core business of investing those assets to support Harvard’s academic operations?

Peer institutions don’t seem put off by the challenge. Princeton, Stanford, and Yale, for example, provide detailed descriptions of their asset classes, the allocation among them, and either annual or 10-year performance by class—including performance versus market benchmarks for each.

Harvard and HMC decide what to report. Narvekar rightly focuses on long-term performance, and the organization and its strategies have changed radically since he took charge. So why not provide allocation and performance data for, say, five years, given the improvements he and his team have wrought? The University’s finances are already sufficiently opaque to nearly everybody (although presumably the largest donors are afforded insight into how their gifts are invested and deployed). Does reducing the information available to everyone else to the annual rate of return and the year-end value of the endowment instill confidence? Or does shrouding a $50-billion-plus pool of exotic investments make it even more mysterious to Harvard’s supporters, and to the world at large?

University leaders have worked hard to strengthen endowment performance, the foundation of the institution’s financial model. Narvekar and his colleagues have made Herculean efforts to get encouraging results. Without giving away any investing secrets, they ought to be able to clue the community in on how it’s going.

 

Similarly, on November 1, Faculty of Arts and Sciences (FAS) dean Claudine Gay reduced her annual letter to anodyne remarks at a faculty meeting (see harvardmag.com/fas-pandemic-rebound-22, and in this issue). The dean’s annual missive was once a deep guide to FAS’s research and instruction. Amid the 2008-2010 financial anxieties, that text attenuated and now has vanished.

Gay is leading a strategic planning exercise, and may not want to tip her hand. She told attendees that FAS’s post-pandemic financial strength made her optimistic about the future, and the planning would “join that optimism with intentionality.” Given changes in disciplines, institutions, and students’ desires, she said, FAS was “leaning into the moment” through self-examination. The outcome would be “a Harvard that works better for our faculty and our students.” The uplifting tone suits the moment, but the brief, minimalist talk—nary a word about academic priorities like her inequality initiative, teaching, or House renewal—hardly conveyed a clear sense of direction. In a community still rebounding from pandemic isolation, that seems a missed opportunity.

—John S. Rosenberg

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