Harvard's real estate portfolio drops 50%

Real estate and private equity were the worst performing asset classes for Harvard Management Company for the fiscal year ended 30 June.

All of Harvard’s asset classes suffered negative returns during a 12-month interlude that Jane Mendillo, HMC’s chief executive, called “the most challenging period in modern times for the financial markets as well as for the Harvard portfolio”. The portfolio was valued at $26 billion on 30 June. This represents a drop of roughly 30 percent from the prior year and marks HMC’s first ever annual loss.

In HMC’s inaugural annual report, Mendillo noted that “nearly every asset class did poorly. Our real estate portfolio, for example, suffered a loss of over 50 percent during the year after considering all final marks through 30 June 2009”.

The report says real assets, which also includes commodities, generated a return of negative 37.7 percent, while private equity returned negative 31.6 percent. Fixed income was HMC’s best performing asset class, returning negative 4.1 percent.

“With perfect hindsight we and most other investors would have started this year in a more liquid position and with less exposure to some of the alternative asset categories that were hardest hit during [fiscal] 2009,” Mendillo said.  HMC allocates roughly 40 percent of its portfolio to alternative investments; its target allocation to private equity is 13 percent, while its target real estate allocation is 9 percent.

Mendillo stressed, however, that long-term performance of alternative asset classes has been positive. “Private equity, for example, has earned an average of 15.5 percent per year for the Harvard portfolio for the last 10 years, even after a 32 percent correction in [fiscal] 2009.”

HMC noted it has taken steps including “early exploration of private equity secondary markets” in order to help “control the damage against the headwinds we faced”. It also said it reduced uncalled capital commitments by $3 billion.

The Yale Endowment, meanwhile, suffered a similar overall portfolio decline of roughly 25 percent to $16 billion. The institutional investor did not release annual returns for individual asset classes.

“If a portfolio produces gains of 41 percent (as it did in the year ended 30 June 2000) and 28 percent (as it did in the year ended 30 Jun 2007), the possibility of suffering the symmetry of double-digit losses should be anticipated.”

Yale also reiterated its deep commitment to private equity and real estate, to which its target allocations are 21 percent and 29 percent, respectively – both of which “far exceed” the average endowment’s 8.6 percent private equity exposure and 13.7 percent real estate exposure.

“Yale’s private equity programme, one of the first of its kind, is regarded as among the best in the institutional investment community,” the report noted. It added that that since the private equity programme launched in 1973, the asset class has generated a 30.9 percent annualised return.