The endowment fund of Harvard surged to a record $68 billion as successful bets on equities and venture capital, including SpaceX (SPCX), helped the richest U.S. college handle an unprecedented pressure campaign from Washington, D.C.
Harvard’s endowment fund returned 27% as donations also rose to $1.5 billion, according to a financial report for the fiscal year ending in June.
These strong gains in the stock market and its hedge fund portfolio allowed Harvard to easily beat the 19% median return before fees for large U.S. college endowments and post its best year since 2021.
But wait. Stanford University, with a 32% return, beat Harvard handily, and the University of Pennsylvania basically tied its performance.
Heading one of these endowments is a hot seat. Harvard’s fund chief is N.P. “Narv” Narvekar, who has been in place for a decade, is ending his career on a high note and has apparently faced some criticism for some investments in private equity.
Endowment gains are crucial to universities as they contend with uncertainty around future government research funding. Cutting costs is also part of the deal; Harvard, for one, froze employee pay.
All the above schools had a solid year due to skilled and perhaps lucky asset allocation with the global perspective that these endowments employ.
What can we learn from these endowments about investing?
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While most individual investors focus on short-term stock picks and chase funds with the highest latest returns, endowments put their energies and resources into asset allocation. By this I mean figuring out what percentage of their capital to put in different buckets of assets such as U.S. or international large-cap and small-cap stocks, real estate, timber, precious metals, energy, different countries, venture capital and private equity.
A key difference is the variety of buckets endowments use to diversify, with the goals of lowering risk and volatility and increasing returns.
Endowment investment returns are critical, as Harvard provided more than $775 million in financial aid and spent $969 million on capital expenditures. Roughly 40% of the university’s operating revenue comes from the endowment.
One edge these endowments have over us mortals is a high allocation to private equity, which grew to 46%. Still, the university maintains significant liquid assets and access to credit lines to supercharge financial flexibility.
Another advantage is that endowments get opportunities to invest in private companies way before they go public. Early-stage investors get in on the game at much lower prices, thus boosting returns considerably as the companies go public. After all, it was a no-brainer that SpaceX would go public at some point.
Stanford may have an edge on Harvard due to its proximity to Silicon Valley and its legions of alumni who become tech mavens, executives, and investors.
Finally, while Harvard held $2 billion in SpaceX shares as of June 3, early investments in SpaceX have fueled stellar gains at a handful of other endowments, with the University of North Carolina and Washington University posting returns of more than 35% in the most recent fiscal year. I’m sure there are others that did even better, but perhaps they took on more risk?
Endowment returns, like our own, must be evaluated on returns over time as well as year-to-year volatility. One great year cannot be followed by a loser. Even a ten-year time frame is too short.
I would love to know what asset classes, stocks, and funds these endowments are after next. We can all benefit from having the patience and discipline to follow the endowment model.
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