Harvard endowment post strong growth, bests benchmarks despite turnover in leadership

Published On Tuesday, July 01, 2008 2:52 PM

By CLIFFORD M MARKS and NATHAN C. STRAUSS

Crimson Staff Writer

Harvard's endowment posted returns of approximately 9 percent through the first 10 months of this fiscal year, according to data from the University. The increase puts the endowment's value at around $38 billion as of this April, up from $34.9 billion as of last June.

While the returns fall short of last year's exceptional 23 percent performance for the full 12-month period, they are comparatively strong given that they come amid a bear market that has seen the S&P 500 index, a standard baseline for stock-market performance, lose eight percent during the same July to April period.

Harvard's fiscal year runs from July 1 to June 30, with the most recent one ending on Monday.

While May and June—the months for which data is currently unavailable—were rough for the equity markets (the S&P index fell an additional 8 percent), the endowment weathered a similarly poor five-month stretch from October to March, preserving the gains that it made from July to September 2007.

Harvard—which has the largest endowment in higher education, though it trails some peers on a per-capita basis—usually announces official annual returns in late August or September.

For this story, approximate endowment returns were calculated from data on the monthly values of "endowment units" that Harvard entities can purchase just as investors buy shares of a company's stock. Changes in unit value for the past decade have tracked changes for Harvard's total endowment over the same periods, but lag overall growth by approximately two percent each year.

To account for this discrepancy, monthly unit changes were adjusted upward by one-sixth of a percent for each month, and two percent was added to the overall growth in the endowment units. (This two percent differential may reflect deductions for management fees or levies on the endowment like the 0.5 percent tax for development of the new Allston campus. A Harvard spokesman was not immediately available for comment on this difference as well as the endowment's returns for this fiscal year.)

While officials from Harvard Management Company (HMC), which manages the University's endowment, refuse to discuss specific investment decisions with the media, HMC's most recent "John Harvard Letter" suggests that growing investments in commodities—a high-performing asset class as of late—may explain much of the endowment's superior performance.

Prices for commodities—goods such as copper, wheat, or oil—jumped by almost a quarter for the first 10 months of the fiscal year, according to the Dow Jones-AIG Commodity Index. The letter, released last August, estimated Harvard's investment in commodities at 17 percent of the endowment for fiscal year 2008, making it their single largest investment by asset class. That number reflects a near tripling of the share of the endowment invested in commodities since 2000.

If this heavy investment insulated Harvard's endowment from rocky market conditions through April, it likely aided returns for the last two months as well. The Dow Jones-AIG Index commodity prices rose another 12 percent in May and June based largely on spikes in the prices of oil and corn futures.

Speculation in the commodities markets has come under fire in recent weeks, with Senator Joseph I. Lieberman arguing that it is responsible for increased prices of food and energy and championed several proposals to limit investing in commodities markets.

Though many in the financial community have viewed Lieberman’s attacks as political posturing—particularly his proposal to bar institutional investors, firms with more than $500 million under management, from trading energy or agricultural futures—both major presidential candidates have echoed Lieberman’s criticisms of speculators in recent days as consumers have continued to feel the adverse effects of high oil and food prices.

Harvard's solid investment returns come at a time of leadership transition for HMC.

While HMC returned to permanent leadership Tuesday with new CEO Jane L. Mendillo, who worked at HMC for 15 years before managing Wellesley College's investments from 2002 to 2008, it spent much of the past year with interim leadership after its former leader, Mohamed A. El-Erian, announced last September that he would return to a high-ranking executive position at Pacific Investment Management Company, a bond-specialist based in Los Angeles.

During his 22-month tenure, El-Erian was tasked with bringing stability to an organization rocked by the 2005 departure of its long-time CEO Jack R. Meyer, who left with a large fraction of HMC's staff amid heated criticism over multimillion dollar compensation packages for him and his top money managers. Meyer and several of his former lieutenants now run the Boston-based hedge fund Convexity Capital Management.

(http://www.autoadmit.com/thread.php?thread_id=830964&forum_id=1#9935742)

By Josh P. Hamilton

July 2 (Bloomberg) -- It must be a bear market because even billionaire Warren Buffett's Berkshire Hathaway Inc. has slumped 20 percent since December.

The decline exceeds the drop of the Standard & Poor's 500 Index and marks the worst first half for the Omaha, Nebraska- based investment and holding company since 1990. Price competition has driven down revenue at Berkshire's insurance units, which account for about half of its income.

Berkshire is ``close to getting more fairly priced,'' said Charles Hamilton, a Nashville, Tennessee-based analyst at FTN Midwest Securities Corp., who has a ``neutral'' rating on Berkshire. ``I wouldn't say it presents a buying opportunity right now.''

After reporting record 2007 earnings of $13.2 billion, the 77-year-old Buffett told shareholders in February that profit margins from insurance will drop.

``That party is over,'' Buffett wrote in his annual letter to shareholders in February. ``It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008.''

Berkshire also has been hurt by the declines of Wells Fargo & Co., American Express Co. and U.S. Bancorp, three of the company's 10 biggest equity holdings at the end of March. Wells Fargo, Berkshire's second-largest holding, dropped 18 percent in the second quarter, while American Express and U.S. Bancorp slipped 14 percent.

Buffett Bulls

Berkshire declined $1,435 to $118,665 at 4 p.m. in New York Stock Exchange composite trading, and is down 20 percent since its all-time closing high of $149,200 on Dec. 10. That exceeds the 17 percent slide of the S&P 500 in the same period. Berkshire spokeswoman Jackie Wilson didn't respond to a request for comment.

The slide hasn't deterred Buffett devotees, who think Berkshire's decline represents a buying opportunity.

``I'd put a new client in Berkshire right now,'' said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which oversees $800 million, including Berkshire shares. ``It's probably the highest-quality collection of individual companies that's ever been assembled. Long slides are not in the Berkshire Hathaway lexicon.''

Berkshire bulls are betting with history on their side: the shares advanced in 17 of the past 20 years. The last annual decline was 3.8 percent in 2002. The company had record earnings last year as Buffett booked a $3.5 billion profit on a $500 million investment in oil producer PetroChina Co., and insurance units made money selling coverage against storms that never came.

`Chaotic Markets'

The decline in financial shares may provide Buffett an opportunity to boost holdings, said Whitney Tilson, a principal at New York-based hedge fund T2 Partners, which counts Berkshire among its investments.

``Where Buffett makes his money is taking advantage of weak, chaotic markets,'' Tilson said. ``The odds that Buffett could do a large transformative deal have gone up substantially.''

Buffett built Berkshire over four decades from a failing maker of men's suit linings into a $185 billion company. He plows revenue into companies whose management he trusts and whose business models he deems superior. The billionaire's Berkshire stake makes him the world's richest person, according to Forbes magazine.

With Berkshire's $35 billion in cash, Buffett can scoop up bargains on beaten-down securities and make acquisitions while near-frozen credit markets curb purchases by leveraged buyout firms, Tilson said.

Bond Insurance

Buffett entered the bond insurance business in December as the largest companies in the industry, MBIA Inc. and Ambac Financial Group Inc., struggled to maintain their credit ratings. CIT Group Inc., the lender that lost about 84 percent of its market value in 12 months, said yesterday that a Berkshire subsidiary agreed to pay $300 million for its portfolio of loans backing factory-built homes.

Tilson calculates the so-called intrinsic value of Berkshire's assets and operations at $157,000 a share. The stock reached intrinsic value in 11 of the past 12 years, Tilson said.

This year's gap emerged amid a drop in commercial property rates from their peaks after Hurricane Katrina in 2005. Property and casualty prices in the U.S. fell 14 percent in the first quarter from the same period a year earlier, according to a survey by the Council of Insurance Agents and Brokers.

Housing Slump

Berkshire, which owns National Indemnity, General Re Corp. and Geico Corp., saw first-quarter earnings from underwriting insurance policies fall 70 percent to $181 million. Pretax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95 percent.

Also damaging to Berkshire's earnings is the biggest housing slump since the Great Depression, which slowed the company's building-related businesses, including Acme Brick and Shaw Industries, the world's largest carpet manufacturer.

Consumers fell behind on loans secured by their homes at the fastest pace in two decades in the first quarter, the American Bankers Association reported today.

Buffett says the U.S. is mired in ``stagflation,'' a period of slowing economic growth and accelerating inflation.

``We're right in the middle of it,'' Buffett said in a June 25 interview. ``I think the `flation' part will heat up, and I think the `stag' part will get worse.''

An economic recovery isn't ``going to be tomorrow, it's not going to be next month, and may not even be next year,'' he said.

Tilson and Carret Zane's Betz say they'll wait. Berkshire gained 26-fold since 1988 in NYSE trading -- a return more than three times greater than the S&P 500.

``I sleep well,'' Tilson said. ``It's not going to double overnight, but we think it will in five years, which is a 15 percent compounded annual rate. It's the stock you want to own.''

(http://www.autoadmit.com/thread.php?thread_id=830964&forum_id=1#9939568)

Correct answer: who gives a shit, did you say billions per year?

(http://www.autoadmit.com/thread.php?thread_id=830964&forum_id=1#9940551)