Endowment Payout at Harvard

In their latest financial report, the school describes the purpose of the endowment and how it works.

The University’s endowment spending practice has to balance two competing goals: the need to fund the operating budget with a stable and predictable distribution, and the obligation to maintain the long-term value of the endowment. There is a common misconception that endowments, including Harvard’s can be accessed like bank accounts, used for anything at any time as long as funds are available. In reality, Harvard’s flexibility in spending from the endowment is limited by the fact that it is designed to last forever, which is crucial for an institution intended to serve generations of students and pursue research on big questions—questions that cannot be answered in one lifetime.

Harvard is obligated to preserve the purchasing power of the endowment by spending only a small fraction of its value each year. Spending significantly more than that over time, for whatever reason, would privilege the present over the future in a manner inconsistent with an endowment’s fundamental purpose of maintaining intergenerational equity. As a general rule, Harvard targets an annual endowment payout rate of 5.0 to 5.5% of market value. In 2019, the payout rate was 5.1% compared to the 5.2% payout rate in 2018. This critical source of funding distributed $1.9 billion in the fiscal year ending June 30, 2019—representing 35% of Harvard’s total operating revenue—and is the single largest source of revenue supporting the University.

Financial Report Fiscal Year 2019, Harvard University

Their new endowment chief is midway through transforming the team and the portfolio.

The primary changes that [Harvard Management Company CEO Narv] Narvekar outlined in the plan included shifting from a unique “hybrid” investment model — one in which HMC retained a large internal staff in addition to hiring outside money managers — to relying more heavily on external firms, a practice consistent with many other university endowments. The plan also included laying off about half of HMC’s then-230-person staff.

Narvekar planned to pursue a broader investment strategy that involves less “silo investing” — in which employees specialize in various asset classes — and move to a “generalist” model where employees focus on overall endowment performance.

Three Years Into HMC’s Five-Year Plan, Experts Say It Is Too Soon to Judge Narvekar, The Harvard Crimson

Harvard has all the time in the world to set things right.

[University President Lawrence S.] Bacow said the University needs to be patient with Narvekar’s plan and said there are “technical reasons” why changes shouldn’t be made too quickly.

“There are commitments that were made forward, which can’t be rolled back, and it takes a while to not only exit from certain investments, but also to move resources into another area,” Bacow said. “You don’t want to try and time the market.”

Bacow Continues to Support Harvard Management Company’s Five-Year Plan, The Harvard Crimson

There are others at the school seeking to influence how and where the endowment is invested.

Tomorrow, Harvard Forward is expected to deliver petitions to the Office of the Governing Board, seeking to qualify a slate of candidates for election to the Board of Overseers who are campaigning on a platform of changing University governance and advocating divestment of any endowment investments in the fossil-fuel industry. Next Tuesday, the Faculty of Arts and Sciences is scheduled to vote on a faculty-written motion calling on the Corporation to direct Harvard Management Company to “withdraw from, and henceforth not pursue, investments in companies that explore for or develop further reserves of fossil fuels.” Although he has made clear his view that climate change is a severe threat, Bacow has also made clear that he believes the University’s contribution to solving the problem lies through research and teaching. He and the Corporation have opposed divestment.

The University in “Contentious Times”, Harvard Magazine

Widener Library at Harvard.
Photo by Pascal Bernardon on Unsplash

Post by Marcelino Pantoja