Inside the Harvard Management Company
Robert Huebscher
March 31, 2009


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The Policy Portfolio benchmark is an average of returns, weighted by asset class, measured across similar institutions, constructed to mirror Harvard’s asset allocations.  Mendillo noted that the median return for peer institutions over the last 10 years was 6.1%, and that Harvard’s outperformance relative to this median added $23 billion to the endowment as of June of last year.

Mendillo took her position in July of 2008, the end date of the figures cited above. The endowment’s performance during the first few months of this fiscal year, through the end of October, was miserable – down 22%.  Mendillo declined to provide more current numbers, only to say that “overall performance is not that different as of today, and we are slightly ahead of our policy portfolio.”

“This magnitude of loss has never happened in the history of the endowment,” she said.  Single digit losses occurred in 2001 and 2002, and the endowment faced negative nominal returns in the 1970s, coupled with high inflation, but neither episode rivals the scope of losses the current portfolio has suffered.

As a result, the university pulled back on some initiatives, most notably a major planned expansion into the Allston area.

“The current environment will not change our goals,” Mendillo said, “but it will change the timing of many projects.”

“It will take some time – perhaps many years – to build back up to where we were prior to these losses,” she said.

Mendillo currently has 34% of the portfolio in public equities, 17% in private equities, 18% in absolute return strategies (hedge funds), and 26% in real assets (real estate and natural resources).  Within public equities, she is equally allocated among domestic, foreign, and emerging markets – an allocation that reflects a shift toward non-US markets in recent years.

Typically, the endowment has a -5% cash allocation, using leverage to invest 105% of its assets.  That decreased to -3% earlier this year and today is “seriously positive,” according to Mendillo.  Starting in July, she decided to raise cash to create room for new investments and to capture profits on existing ones.  Since then, she has been forced to raise cash to provide funds for Harvard’s operating expenses, often by selling illiquid investments.

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