Harvard University: What investors can learn from the strategy of the largest endowment fund

Rich US universities

The five US universities with the largest endowment at the end of tax year 2020 were Harvard University (42 billion dollars), Yale University (31 billion dollars), the University of Texas System (31 billion dollars), Stanford University (29 billion dollars) and Princeton University (26 billion dollars). Overall, the market value of the endowments of colleges and universities in the USA was 691 billion dollars and was therefore two percent higher than at the beginning of 2020.

However, their performance is even more impressive than the enormous endowments of many US universities: In the financial year ended June 30, 2021, the Harvard foundation assets alone achieved a Performance of 33.6%. Even in the long term, the Harvard Management Company (HMC) fund outperforms compared to major indices such as the S&P 500. But what is the secret of the success of the Harvard investment strategy, which now also serves as a blueprint for private and institutional investors?

The investment strategy of the Harvard Endowment Fund

Harvard University's endowment, together with pension assets, working capital and in-kind donations, is managed by Harvard Management Company (HMC), a Harvard-owned investment management company. The majority of donations (around 80 percent) are subject to restrictions — they are intended for specific courses of study or projects. Only around five to 5.5 percent of the fund's reserves are used each year to finance the operation of the university. In 2020/21, that was around two billion dollars (1.72 billion euros).

In general, because of its responsibility for the future of the educational institution and the assets entrusted to it, the Harvard Investment Fund should focus on reducing risks rather than maximizing profits. But during the global financial crisis The elite university lost around a quarter of its original foundation assets due to incorrect strategic decisions and risky forms of investment, such as derivatives. Before the 2008 crisis, Harvard University had around 37 billion dollars in endowment assets. It wasn't until six years later that assets again reached just under 36 billion.

Since then, the Harvard Investment Fund has focused primarily on effective risk management and asset allocation. The biggest chunk in the university's investment mix in the past financial year was public and private equity, with a total portfolio share of 48 percent. These asset classes achieved In 2021, an increase of 50 percent or 77 percent. Hedge funds and real estate ranked third and fourth, with an investment return of 16 and 13 percent, respectively.

What investors can learn from Harvard asset managers

Put simply, the secret to the success of elite US universities such as Harvard lies in diversifying investments across many different asset classes and the addition of alternative investments. The focus on private equity includes the fact that the Harvard Foundation provides money mostly to young companies. Despite attractive return opportunities, private investors are generally denied this direct investment opportunity.

However, alternative investments, such as real estate, are also available to private investors. For example, in form digitized real value shares, which investors can use to create a diversified multi-asset portfolio. Digital shares also have the advantage that they are liquid compared to private equity investments or real estate and can be traded on the secondary market at any time.