There’s one ranking in higher education where the top college never changes. With an endowment that currently totals around $37 billion, Harvard University has for decades firmly grasped the mantle of world’s richest school.
However, what was once insurmountable advantage is looking more vulnerable. Over the past decade, Harvard’s endowment—fed by donations and investment returns—has grown by less than 2 percent while rivals have made bigger strides. Third-place Stanford University’s fund rose by an impressive 44 percent in that time, to a record $24.8 billion as of midyear. Yale University, long the second-richest school in the world, was up 20 percent, to $27.2 billion, also a record.
What’s been working in Stanford, California, and New Haven, Connecticut, that hasn’t in Cambridge, Massachusetts? The answer is simple, according to industry observers. While preeminent in so many categories, Harvard is profoundly mediocre when it comes to investing strategy. In the 10 years ending June 30, its annual average return from investing its endowment was 4.4 percent. That’s below average in higher education and trails the school’s peers—in some cases significantly. Stanford posted an annual average return on investments of 5.8 percent, while Yale generated a 6.6 percent return.
“If you’re able to outperform in a top quartile-way, you’re going to pull ahead—that’s just mathematics,” said endowment expert William Jarvis, now with U.S. Trust in New York. He recently left the Commonfund Institute, which works with nonprofits to enhance their investment strategies. “Compounding is so powerful,” Jarvis said.
Compounding, for the uninitiated, is the reason your bank account generally gets bigger, at a faster clip, the more money you have in it. As interest (or investment) income is added to your principal, your interest income increases. When you’re talking about billions of dollars, that kind of compounding can add up fast. Harvard spends about 5 percent of its endowment annually subsidizing the university, which is in line with practices at other schools. Traditionally, endowments use the money to drive the quality of schools, subsidizing financial aid and academic operations. The wealthier the college, the more it can spend on scholarships and top faculty. Last year, Harvard tapped its endowment for about $1.8 billion, accounting for 36 percent of the university’s yearly budget, according to an annual report.
Harvard is also a prolific fundraiser, having collected $6.2 billion in gifts from 2008 through the middle of 2016 and funneling $2.4 billion into the endowment, according to the Council for Aid to Education. Only Stanford collected more, at $7.3 billion, over the same period.
Having the biggest bank account is more than just cash in hand. It also means bragging rights that can be leveraged to attract more and better students. More money to build more facilities and fund more scholarships creates a virtuous, and immensely profitable, cycle for a university.
Harvard maintained an internal trading desk and did more direct investing in real estate and timberland
So with all those great, big numbers, what’s the problem with Harvard?
The math problem comes down to investments, and the university is well aware of its predicament. The division overseeing Harvard’s endowment commissioned a report by McKinsey & Co. in 2015 that warned Yale could claim the title of biggest endowment over the next two decades. The confidential document quoted anonymous employees complaining that Harvard’s endowment had descended into mediocrity because of easy-to-beat internal benchmarks.