Harvard's not so smart investment decisions

Wall Street Journal:

Harvard University's endowment suffered investment losses of at least 22% in the first four months of the school's fiscal year, the latest evidence of the financial woes facing higher education.

The Harvard endowment, the biggest of any university, stood at $36.9 billion as of June 30, meaning the loss amounts to about $8 billion. That's more than the entire endowments of all but six colleges, according to the latest official tally.

Harvard said the actual loss could be even higher, once it factors in declines in hard-to-value assets such as real estate and private equity -- investments that have become increasingly popular among colleges. The university is planning for a 30% decline for the fiscal year ending in June 2009.

Other university endowments also are suffering, and many states are cutting public funding of higher education. Colleges are instituting hiring freezes, planning enrollment cuts and discussing steep tuition increases, intensifying worries about the impact of the recession and financial crisis on college access.

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The University of Virginia Investment Management Co. said it lost nearly $1 billion, or 18%, of its endowment over the four-month period, reducing it to $4.2 billion. In Vermont, Middlebury College says its endowment fell 14.4%, to $724 million. In Iowa, Grinnell College's endowment dropped 25%, to $1.2 billion. In Massachusetts, Amherst College says its endowment, $1.7 billion as of June 30, also fell by 25%.

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Harvard's loss marks a sharp reversal from the endowment's formerly chart-topping performance. Harvard and Yale University -- which hasn't disclosed its endowment's recent performance -- pioneered an investment approach that de-emphasized U.S. stocks and bonds and placed large sums in more exotic and illiquid investments, including timberland, real estate and private-equity funds. That strategy, which was widely copied, helped the schools avoid significant losses after the technology boom ended in 2000.

But the current market has been far less favorable, partly because both Harvard and Yale have relatively small holdings of bonds, such as U.S. Treasurys, one of the few assets that have performed well. Harvard began its fiscal year with a target of having 33% invested in publicly traded shares, split among U.S. stocks, which have dropped 24% in the four months through October, and international stocks, which have fared worse.

Other investments, such as commodities, which were a boon to Harvard in past years, have turned negative in recent weeks. Harvard has sought to sell off about $1.5 billion in investments with private-equity firms, which typically use their assets to fund corporate takeovers, according to people familiar with the situation. That would be one of the largest sales ever of a private-equity stake. But its private-equity partnerships received bids of only around 50 cents on the dollar, say other people familiar with the matter.

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At one time the University of Texas was second only to Harvard in the value of its endowment. While this report did not discuss UT's endowment, it has probably done rather well this year because of the value of its oil and gas leases in the Permian basin which is going through another boom period because of the high price for oil earlier in the year. Midland Odessa are still listed as the top places for finding jobs in the country. Some of the wind farms may also contribute to the Permanent University Fund. The audit for the year ending August 31, 2008 shows the income from the mineral leases on land owned by the PUF largely offset investment losses. That audit period ended before most of the major losses and before the decline in oil and gas prices so the first quarter of this fiscal year is probably down some.