Harvard's record-breaking $9.62 billion capital campaign

Colleges and Universities A-Z Harvard University
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Harvard Magazine has a detailed and very interesting recap of the results of the recently-concluded campaign here: https://www.harvardmagazine.com/2018/09/harvard-campaign-total-9-62-billion

One thing that comes through clearly is the critical importance of the campaign in rebuilding the endowment, which lost around 30% of its value in the financial crisis. Operating costs have gone up by 35% since that time, and income from the endowment is depended on to cover around a third of the budget every year. Accordingly, since the endowment’s investment performance has been mediocre for most of the last decade, without the capital campaign Harvard would have had to shrink its operations substantially or spend the endowment down. Harvard may have the largest endowment of any U.S. university, but the crisis put a major strain on Harvard’s finances.

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https://www.wsj.com/articles/harvards-investment-gain-trails-rivals-1538150400?mod=searchresults&page=1&pos=1
The endowment still trails in performance. But it looks like Narvekar is doing a decent job unwinding the past mistakes and making up lost ground.

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Still trailing Swensen: https://news.yale.edu/2018/10/01/investment-return-123-brings-yale-endowment-value-294-billion

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Swensen has been the king of endowment. I wonder if you take volatility into consideration what everyone’s alpha is.

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I think you’d have to calculate that using each manager’s returns and volatility relative to those of some benchmark, but I don’t know what that benchmark would be.

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The most commonly used benchmark is the S&P500, or you can use total US Market return. My hunch is that these endowments can barely show some positive alpha. But again as I recall something like 95% of professional asset managers under-perform the market in the long run.

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Alpha is just outperformance relative to a benchmark. That benchmark can’t be the S&P 500, because endowments at these kinds of schools aren’t managed to beat the stock market. They can’t live with stock market volatility, not with the habit they’ve fallen into of funding roughly a third of their annual operating expenses with endowment distributions. They aim for good and consistent returns, with a high Sharpe ratio, which measures return above the risk-rate rate relative to risk taken (as expressed in the standard deviation of returns).

The rough-and-ready benchmark available is a 60-40 portfolio (60% stocks and 60% bonds), since the bonds are less variable than the stocks and produce income, and this portfolio tends to provide a long-run return close to 100% equities but with fewer large drawdowns. Anyone with a brokerage account can create this portfolio very cheaply with index funds, ETFs, etc.

Endowments like Yale, though, have access to all kinds of asset classes, including venture capital, private equity, natural resources, etc. that can be sources of high returns to an expert investor and, importantly, aren’t necessarily highly correlated with each other (in other words, although they all might provide good long-term returns to an investor who’s good at picking them, they’ll all have ups and downs and, at a given time, some might be moving in different directions). This is a good thing, because although the portfolio will have a good long-term return overall, the different return profiles of the investments will offset each other to some extent and reduce the portfolio volatility.

So, because of the mix of different types of investments, I don’t know what benchmark you could reasonably use to calculate Swensen’s alpha. Also, his mix of investments will be different from everyone else’s, so it may not be appropriate to compare them using the same benchmark. This is why university endowment managers often measure the performance of the individual asset classes in their portfolios with reference to benchmarks specific to each asset class.

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I was going to write something similar to what @DeepBlue86 wrote above. But one thing to note is that Harvard’s 30% drop during the financial crisis understates what actually happened, and so its fiscal condition was considerably worse than commonly believed.

This is because many private equity funds didn’t fully mark down their assets to fair value during the crisis. Those assets tend to get marked to market infrequently, particularly when doing so reflects poorly. Interestingly it was precisely because the PE funds were so reluctant to sell (because doing so meant realizing losses) that groups like Harvard had to sell equities in order to raise cash, making the crash in equities worse than it otherwise would have been.

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Harvard Corporation recently invited David Rubenstein to join. Rubenstein is a well known philanthropist. He raised a lot of money for Duke and UChicago. So it looks like they are looking for rainmakers to help bring in more money.

Surprised to see that a third of operating income comes from the endowment.

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At Princeton, more than half the operating budget is funded by the endowment: https://www.princeton.edu/news/2018/10/08/princeton-endowment-earns-142-percent-return

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@deepblue86: thanks for sharing. Seems to me that these universities are counting on the endowment for too many things. Half of operating budget? Sounds too risky. Wouldn’t it make more sense to use the endowment to fund ‘nice to haves’, instead of the main operating budget?

Wonder what they will do during a prolonged downturn?? How will they cut back?

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That’s a good question, @sgopal2…

Princeton just looks extreme because it doesn’t have large professional schools with their own sources of revenue. At Yale, for example, the School of Medicine (which includes Yale-New Haven Hospital and Yale Medicine, a very large multi-specialty clinical practice) accounts for 46% of the university’s total operating revenue, with medical services income and managed care contract revenues accounting for a substantial majority of that number (see here: https://your.yale.edu/sites/default/files/2016-2017_yale_financial_report.pdf)

If you subtracted medical services income alone, 44% of total Yale University revenues would come from endowment income. The total revenues from the School of Medicine are more than twice those from the Faculty of Arts and Sciences, which includes Yale College and the Graduate School. Effectively, Yale University is a medical school/hospital with a college, a few other schools/institutes and some collections and other assets attached.

People who say elite universities with big endowments are just filthy rich hedge funds that should be taxed don’t understand this. The financial model is much more fragile than it appears.

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Remember, it’s the EARNINGS from the PRINCO invested endowment that cover the operating budget.

“‘The earnings from our endowment cover more than half of the University’s annual operating budget, as well as help fund our highest priority strategic initiatives,’ Provost Deborah Prentice said.”

These wealthy institutions have survived recessions after recessions over their existence for the past hundreds of years, and “risk” isn’t something I’d worry about. They’re wealthy in part due to world-wide alumni giving and capital campaigns, and why legacy system, although diminished somewhat today, is still an important part of their admissions practices.

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An often underappreciated fact about top privates like Harvard and Yale is that the College is actually a loss leader in their business. Despite $50k tuition the true cost is more like $90k. I am always amazed that people complain about $10M donors’ kids getting an edge. But without them the tuition cost may be $90k.

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I’ve posted this on another thread, but MIT does absolutely fine without giving an admissions boost to legacy students. It is just about as generous with financial aid as the other elite schools, teaches a larger percentage of lower and middle income students than HYP, and its STEM focus is often more expensive to teach (in terms of lab costs and such) than colleges with a liberal arts focus.

Why is MIT able to do this, and the others unable?

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Legacy and donor are different things. MIT has not disclosed anything about its donor preferences though. With most of its department in college being STEM, MIT probably receives far more federal and industry funding than Harvard and Yale in its percentage of operating budget.

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@hebegebe Unable or unwilling?
You just don’t hear about MIT letting kids in because they really wanted to go and Daddy wrote a big check. Seems like the academics are unassailable. Caltech is the same. You have to have the merit to walk thru the door. This could be due to less reliance on a “holistic” approach and more reliance on actual stats of the student. High level universities should be accessible to all based on their merits.

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Leaving federal dollars aside, MIT’s endowment per student is about $1.2m, not too far from Harvard’s $1.6m (even with Harvard’s longer history). So, MIT is doing just as well as Harvard raising private donations, without legacy considerations or development cases. Same at Caltech.

These fine institutions can raise funds based on their reputations and merits. Don’t tell me that Harvard can’t.

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It seems to be similar at Yale, @TiggerDad. The amount contributed from the endowment as operating revenues ($1.2 billion) was substantially less than the nearly $3 billion in investment gains in the latest year for which we have financial statements. Comparing the two schools, though, shows the similarities and differences more clearly.

Princeton had $1.8 billion of operating revenues, of which $1.1 billion was contributed by the endowment. Yale’s operating revenues were roughly twice as large on a gross basis, at $3.7 billion. As noted above, a similar amount of $1.2 billion was contributed to Yale’s revenues by the endowment (Yale’s endowment is slightly larger than Princeton’s and their investment returns are similar, so this is what you’d expect).

In Yale’s $3.7 billion, though, is $905 million of medical services income, relating to the School of Medicine, the hospital and clinical practice organization, of which Princeton has no equivalents. Similarly, Yale’s $768 million of grant and contract income looks large relative to Princeton’s $296 million of government grants and contracts, but a lot of it comes from managed care companies, BlueCross BlueShield, Medicare, Medicaid, etc. In total, Yale reported just under $1.7 billion in revenues from the School of Medicine (of which only a small sliver was income from its endowment that would have been reported as part of the consolidated endowment income total). So, when you strip out the School of Medicine to compare the two schools more closely, they are more similar than you’d think, with Yale slightly larger in terms of budget and endowment.

That said, Yale has far more students. Princeton has about 5,200 undergraduates and about 2,750 graduate students; Yale, halfway through its expansion of the college by 15%, will soon have about 6,200 undergraduates, with about 2,900 graduate students and about 3,250 in the professional and arts schools (Divinity, Law, Art, Music, Forestry & Environmental Studies, Nursing, Drama, Architecture and Management), as well as about 850 in the School of Medicine (not including medical residents and PhD students). Accordingly, Princeton is far wealthier “per capita”, which is probably why they’re in a position to be planning an expansion of their own (https://campusplan.princeton.edu/).

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Without MIT disclosing its admission data like Harvard did we just don’t know if there are development cases at MIT. We know that Netenyahu and Koch family went there.

But comparing Harvard and MIT funding is like comparing that of LACs and tech schools. We know many fine LACs are experiencing funding crisis these days while the tech schools are thriving. I imagine maintaining a medieval studies program at Harvard is much more expensive than electrical engineering program at MIT, and Harvard just has so many of those liberal art programs.