Here's What Investors Can Learn from Harvard's Mistakes


The handling of Harvard’s endowment has garnered a great deal of financial scrutiny lately. Though the amount of money managed by the university is much larger than what a typical individual investor would handle, there are still lessons to be learned here.

Two indisputable facts: 1. Harvard University is one of the world’s premier educational institutions. And 2. Harvard has the largest U.S. college endowment with $35.7 billion in assets.

However, Harvard Management Company, which employs a staff of 230 to oversee investment of the endowment, has received criticism in recent years for insufficiently adapting to market conditions since the market crash of 2008. In the 1990s and early 2000s, Harvard’s endowment performed better than its peers with investment strategies that were characterized by managing a large portion of its funds internally with little coordination among investment managers and by holding a significant percentage of its assets in long-term illiquid private investments.

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This strategy was appealing because the size of Harvard’s endowment affords it a much longer time horizon than most other foundations and nearly all individual investors. When the market crashed in 2008, however, Harvard’s managers felt compelled to get out of many of those illiquid assets at what turned out to be the bottom of the market and sold them at the most inopportune time. In recent years, Harvard has strived not to over-commit to illiquid assets, but the endowment has never quite recovered from its past losses and has struggled to turn around its performance.

Since 2008, the endowment’s performance has been inconsistent relative to its peers, and for fiscal year 2016 (the 12 months ending June 30, 2016), Harvard lost 2 percent on its investments. In comparison, a hypothetical index portfolio with 60 percent of its assets invested in global stocks and 40 percent in global bonds would have returned +2.3 percent over the same time. The annualized 5- and 10-year performance of the endowment has also lagged its peers. For example, Harvard’s average 5-year return was 5.9 percent while Yale’s was 10.3 percent for the same period.

As a result of the fund’s lagging performance, Harvard recently announced sweeping internal changes, including an overhaul of management and plans to cut staff by half over the next year. Most of the funds that had been managed internally will be outsourced, and the endowment’s reward system will be revamped to be more closely aligned with overall performance.

So what can individual investors learn from Harvard’s experience with its massive endowment? You may want to take a look at your own portfolio or pose the following questions to your investment advisor.

· Is my portfolio adequately diversified to reflect global asset classes?

· Do I hold any illiquid assets in my portfolio, and what could be the impact of seeking to get out of them?

· How is my portfolio structured to address the challenges of a low interest rate environment?

· Has my portfolio produced short- and long-term returns that mirror appropriate benchmarks?

Harvard’s significant advantages of size and scale have not helped it avoid performance challenges, and individual investors are even more vulnerable to challenges of market and economic trends. If you are not satisfied with the responses to questions such as these, you may want to rethink your investment strategy.

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This article contains content that is not suitable for everyone and is limited to the dissemination of general information pertaining to Modera’s investment advisory and financial planning services and general economic and market conditions. Nothing contained herein should be interpreted as legal, tax or accounting advice, nor should it be construed as personalized investment or financial planning advice. For legal, tax and accounting-related matters, we recommend that you seek the advice of a qualified lawyer or accountant. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed herein will come to pass. Investing in the stock and other markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or to engage in a particular investment, financial planning or other strategy. Diversification does not guarantee a profit or guarantee against a loss.

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