Harvard’s endowment and liquidity – some insights for family offices

As markets teeter, Harvard University has gone out of its way to confirm its $41 billion endowment has sufficient liquidity to weather the storm. 

Chief financial officer Thomas Hollister has told the Harvard Gazette: “We’ve done a lot of recession-based scenario planning, and the university is in a much better position than following the 2008 financial crisis with respect to liquidity and the capacity to withstand stress.” 

Across the world, family offices and endowments are subjecting portfolios to stress tests, at a time when advisers have encouraged them to remain fully invested

University expenditure is being kept tight, according to Hollister. “Thanks to purposeful planning by Harvard Management Company, the endowment is comparatively liquid, does not have any substantial derivative exposures, and is not broadly leveraged.” 

Harvard has the largest academic endowment in the world. It is significant that it has felt obliged to comment on its exposure to market volatility. 

Across the world, family offices and endowments are subjecting portfolios to stress tests, at a time when advisers have encouraged them to remain fully invested.  Many have lifted their exposure to private assets and venture capital which are relatively illiquid. 

One family office adviser said: “We’re checking our portfolios, switching out of alternatives where that makes sense, and deciding whether to move ahead with private equity commitments.” Another said: “We’re second-guessing what might happen next, particularly in the credit market.”

Harvard’s position is delicate following the pain it endured during the 2008 financial crisis, when the liquidity of its portfolio evaporated, triggering a 30% fall in value to $26 billion. To satisfy its spending obligations, the university was forced to raise $2.8 billion through a bond issue.

This experience evolved from leveraged strategies put together for the endowment by Jack Meyer and his successor Mohamed El-Erian. Their strategy offered strong returns but lacked liquidity when tested by a crisis. The 2008 upset coincided with an ambitious spending plan for expansion at Harvard University. 

Successor Jane Mendillo sold some quality assets to lift the endowment’s cash buffer to 3%. She told The New York Times: “For a long time, Harvard had a negative 5% position. That means 105% of assets at invested most times.”

In the year to June, the Harvard Management Company, now led by Narv Narvekar, said the Harvard endowment had a 6.5% return. Around 26% of its portfolio was allocated to listed equities, 6% to bonds and 2% to cash.  

Exposures to hedge funds were 33%, with illiquid positions comprising a fifth of the total. Which implies that more than half of the June portfolio would be relatively liquid. 

A further 20% of the portfolio comprises private equity. According to the June report: “Harvard’s exposure to venture capital is notably small in the context of leading endowments.” Natural resources comprise 4% and real estate 8% of the total.

Last October, Narkekar said: “HMC generally takes lower risk and therefore will likely generate lower returns than many peers over a market cycle.”

Now, we are about to learn whether its precautions have paid off.  Thomas Hollister’s comments are encouraging, but only time will tell.