Endownment
I remember when I was at Harvard hearing a lot about how the endowment there wasn’t just big, it was exceedingly well-managed. You know, by people so smart they impressed Harvard smartypantses with their smarts. But not smart enough to dodge a downturn, it seems:
Harvard officials say the university’s largest-in-the-nation endowment lost about 22 percent of its value, or $8 billion, in the four months since the end of the last fiscal year. [...] They say the university should plan for a 30 percent drop in endowment value by the end of next June.
[Executive Vice President Edward] Forst tells The Harvard Crimson student newspaper that the 22 percent estimate may be conservative because some university money is handled by external managers that have yet to report figures.
Of course a 30 percent loss isn’t actually so bad given the current market climate, especially if the university really did get larger-than-normal returns during the upswing years. So maybe these guys really do know what they’re doing.
Meanwhile, giving money to wealthy elite universities still doesn’t make much sense. If you want to donate to something in the educational field, find a small, un-famous school that seems to be doing a decent job and could really put money to good use and help them out. Or find a local charter school (or my friend Komal’s school in Boston) that’s getting good results with disadvantaged kids and help them.
35 Responses to “Endownment”
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December 3rd, 2008 at 10:40 am
Tom Friedman could use Harvard’s financial managers.
December 3rd, 2008 at 10:44 am
And if you really want to make a difference, give your money to a community college that rescues kids who were lost in public education, typically because of learning styles outside those met by public schools. At 20 or so, their cerebral cortexes have developed to the point where they’re able to learn more easily in the ways educators expect them to learn.
Community Colleges give them a chance to prove themselves. Community colleges are our redemption centers on our investment in children; it’s our chance to prove we really didn’t fail so many of them as we thought. And every once in a while, a real genius shines though.
December 3rd, 2008 at 10:49 am
Actually, as you allude to, a 22% loss in this climate is frankly amazingly good. If you were 60/40 stocks/bonds you’d be about there, but then you wouldn’t have made NEARLY such high returns in the last few years– more like 6%/year instead of 20-odd % per year. Absent skill, you would expect proportionally high drawdowns to your upswings (all that you need to take risk to get return)– which would mean they would be down about 70%, not 22%.
December 3rd, 2008 at 10:52 am
Hell, the S&P 500 is down over 40% this year. If Harvard’s managers have cut the market’s losses by half, they’re doing pretty well all things considered.
December 3rd, 2008 at 10:52 am
I don’t get it – why are you talking about Harvard’s endowment? Surely the size of John Harvard’s dong has nothing to do with how the university is run…
December 3rd, 2008 at 11:13 am
Your philanthropy advise is actually more true the richer you get. There are still a lot of good schools out there in the back pages of the US News rankings where $4 million or so can make you the biggest donor in school history.
December 3rd, 2008 at 11:23 am
I would love to see even 10% of the donations that currently go to the Ivy League schools diverted to community colleges and technical colleges, which actually work to educate so much of the American workforce and raise the overall level of scientific/technical proficiency.
Unfortunately a lot of philanthropy is more about the donor’s ego than providing the most efficient help. I remember when the Gates Foundation announced it would begin a HUGE mosquito net distribution program, which is proven life-saver in Malaria-prone countries. It got about 1% of the media attention and Silicon Valley Fanboy love that the completely worthless One Laptop Per Child fiasco did. Sigh.
December 3rd, 2008 at 11:38 am
FYI, from an institutional marketing piece I’m working on right now.
“In the 10 years ended June 2007, individual investors with a standard allocation of 60% stocks and 40% bonds earned a single-digit return of 7.0%, while Harvard and Yale posted annualized returns of 15.0% and 17.8%, respectively.
December 3rd, 2008 at 12:28 pm
If the value of Harvard’s endowment falls 50%, it needs a 100% gain to get back up to break-even level.
So I’d withhold the kudos for Harvard’s managers.
Paul
December 3rd, 2008 at 12:44 pm
Actually these aren’t the same money managers that they had back when we were there. Apparently they left in 2005 because alums were upset that they were getting paid too much.
December 3rd, 2008 at 12:47 pm
FWIW, you just made my heart go all melty.
December 3rd, 2008 at 1:11 pm
Or, to shamelessly promote my pet cause, to organizations like the National Urban Debate League, which support debate programs in urban schools and result in a 25% increase in literacy skills, a 10% increase in GPA, and a 20% increase in college matriculation rates–from 71% to 91%.
Just sayin…
December 3rd, 2008 at 1:17 pm
I should specify that those numbers above refer to individual participants, not broader school performance–but education reform that focuses on raising averages without offering self-motivated young learners opportunities to blossom will continue to squander the greatest potential of its students.
December 3rd, 2008 at 2:42 pm
Actually these aren’t the same money managers that they had back when we were there. Apparently they left in 2005 because alums were upset that they were getting paid too much.
I saw a presentation from them at Sloan Business school. Their new fund is up by a *lot* this year. I shouldn’t say how much but their investors will be very, very happy.
December 3rd, 2008 at 2:51 pm
@ #9
Paul, with the important caveat that later comments suggest different people are responsible for the gains and the losses, an investment record of going up more than the market when it goes up and down less than the market when it goes down is nothing to sneer at. If Harvard were simply doubling or tripling the market’s average performance, a possibility that could have explained their past excellent performance in good years, they would have been practically wiped out in the last few months. Instead, they’re down, but down less than the average, which while painful is Not Too Shabby in the longer run.
December 3rd, 2008 at 8:08 pm
I think everyone’s comparison is off. I don’t think you should compare a large institutional investor like Harvard straight against any one index fund. They are supposed to have a more balanced portfolio to preserve more of their capital rather then being 100% in the equities market. However they were able to beat the market for the past few years because they are able to invest in partnerships that directly invested in real estate unlike pension plan administrators and insurance companies. However unlike stocks, you can’t just sell your interest in a partnership very easily so their losses might end up being worse then the markets
December 4th, 2008 at 12:30 am
Yglesias says to contribute to “non-famous” schools as if all the “famous” schools have large endownments. Not so. Only a small portion of the nation’s top universities and colleges have large endowments relative to their needs. The best schools to contribute to are the very good schools that don’t have enormous endowments. That’s be pretty much everyone that isn’t among the very most famous and prestigious.
December 4th, 2008 at 1:08 pm
@ #15
1. The point remains that a high risk strategy can only work if your up years are much more good than your down years are bad. This is hard to do (although Harvard’s connections may make it a little easier).
2. Harvard’s performance may be considerably worse than -22%. The -22% figure excludes large investments in timber, private equity and other illiquid investments the value of which is probably way down. For example, press reports indicate that Harvard is shopping around $1.5 billion in illiquid private equity holdings for which it is unlikely to get more than 50 cents on the dollar. (Of course why an entity with a perpetual life is selling illiquid investments at somewhere close to the bottom of the market is another question.)
Paul
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