Harvard endowment posts ‘disappointing’ results

But the $36bn fund reported strong real estate returns as it plans to spin out its direct real estate platform by year-end.

Harvard Management Company, which oversees the university's $35.7 billion endowment, has said it is disappointed by its annual returns despite a ‘strong’ performance in real estate, PERE's sister publication, Private Equity International, reported Thursday.

The endowment generated an 8.1 percent return for the fiscal year ended 30 June 2017, up from a 2 percent loss the previous year, according to a letter from NP Narvekar, chief executive of HMC, from earlier this week. The growth reflected strong performances across the endowment’s public equity, private equity and direct real estate platform, according to the letter, although HMC did not comment on the specific performance of its real estate portfolio.

HMC had a 14.5 percent allocation to real estate as of June 30 2016, according to its 2016 annual report. The fund’s direct real estate holdings generated a 13.8 percent return for the fiscal year ended June 30 2016, above its 9.4 percent benchmark.

HMC's robust real estate returns last year were largely driven by its direct investment program in the asset class. The internally-led strategy, which began in 2010, now comprises more than half of the overall real estate portfolio and returned 20.2 percent for fiscal year ended June 30 2016.

HMC executed secondaries sales in private equity and real estate this year that generated “significant liquidity” for the endowment. In April, the manager sold $2 billion of real estate assets to Landmark Partners and Metropolitan Real Estate Equity Management in a bid to reduce its exposure to the asset class, PERE previously reported.

By contrast, the fund reported a challenging year for its natural resources investments.

“Our performance is disappointing and not where it needs to be,” Narvekar noted. “Indeed, the opportunity to improve this is what attracted me to the leadership role of Harvard Management Company. The endowment’s returns are a symptom of deep structural problems at HMC and the resultant significant issues in the portfolio.”

Narvekar’s disappointment comes despite an “aggressive plan to restructure HMC and create the necessary organizational and investment culture” since joining in December, the letter stated. The chief executive’s efforts have included establishing a new generalist investment model, recruiting new senior investment team members and creating a new risk framework.

As part of HMC's overhaul, the fund announced in January that its real estate team would spin out and become an external manager by the end of the year. Although HMC’s investments in internally-managed portfolios generated superior returns in the past, in recent years, the massive flow of capital to external managers has made it more difficult for the endowment to attract and retain talent and remain agile enough to take advantage of shifting opportunities.

Nathan Flanders, a managing director at Fitch Ratings, told PERE in January that HMC was an exception among its peers for investing in alternatives internally. 

– With additional reporting by Meghan Morris