WRAPUP 1-Harvard and Yale endowments suffer heavy losses

Thu Sep 10, 2009 9:01pm EDT

* Harvard endowment down 27.3 pct, biggest loss in 40 yrs

* Yale endowment off 30 percent

* Losses prompt cost cuts, revision of investment strategy

BOSTON, Sept 10 (Reuters) - Harvard and Yale, America's two richest universities, said on Thursday their endowments lost roughly 30 percent of their value last year, showing how severely the financial crisis battered even the world's best managers.

Both schools, long admired for delivering top-notch returns for years, warned about the declines late last year when their presidents told students, faculty and alumni about upcoming heavy cutbacks.

Harvard, located in Cambridge, Massachusetts, said its endowment dropped 27.3 percent, or $11 billion, to $26 billion in the year that ended on June 30. Despite the loss, the endowment has still returned an average of 8.9 percent every year for the last decade while the average comparable fund has risen 3.2 percent, according to research and consulting firm Wilshire Associates.

Harvard's investment decline, the biggest in four decades, forced the 373-year-old school to lay off staff and interrupt a prominent campus expansion across the Charles River.

Yale, located in New Haven, Connecticut, said its endowment shrank a larger-than-expected 30 percent to $16 billion in the fiscal year that ended on June 30.

The drop means that Yale will have an annual deficit of $150 million from 2010-2011 to 2013-2014, Yale President Richard Levin wrote. He also said the school will cut another 5 percent from non-salary expenses this year after having already reduced staff and non-salary expenses 7.5 percent this year.

In recent years both Harvard and Yale invested heavily in hedge funds, private equity funds and timber, relying on these alternative asset classes to add billions to their endowments.

Last year, however, many of those bets did not pay off and both Ivy League schools lost far more than the median college endowment which concentrated mainly on stocks and bonds and dropped 18 percent, according to Wilshire Associates.

Jane Mendillo, head of Harvard Management Co, which oversees the school's endowment, blamed Harvard's heavy commitments to illiquid asset classes for the losses.

Harvard did not have enough cash on hand in the last year, Mendillo said in a report where she outlined changes to the way the university will invest from now on.

"We expect to see a prolonged period of instability and slower growth in some markets," she wrote in the report.

To raise cash, Mendillo sold stock, pulled money back from certain hedge funds and exited some private equity funds. She also laid off a quarter of the workforce, or 50 people, at Harvard Management to cut costs.

Additionally, Harvard is reducing its exposure to real assets like real estate, timber and commodities and is investing is shrinking its future commitments to private equity funds and other investment funds.

Harvard will also have a bigger cash buffer, keeping roughly 2 percent of the portfolio, instead of having it fully invested.

(Reporting by Svea Herbst-Bayliss; Editing by Richard Chang)

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