Harvard University reports a 9.6% endowment return

Every year around this time, Ivy League universities in the United States release their endowment performance reports, providing a snapshot of how their vast assets are growing. The fiscal year for university endowments runs from July to June, and annual performance figures are typically announced in October. This year, Columbia University led the pack with an impressive 11.5% return on its endowment, followed closely by Brown University at 11.3%. Harvard University, one of the largest endowment managers in the world, reported a solid 9.6% return, while Cornell University trailed with 8.7%.

The assets managed by prestigious American universities total tens of billions of dollars. As of June this year, Harvard University oversees $53.2 billion, Yale University $41.4 billion, and Princeton University $34.1 billion. Harvard's endowment alone is comparable to the GDP of Tunisia, a country with a population of 11.7 million. The profits generated by these endowments are substantial. Harvard earned $2.5 billion in endowment returns last year, while Yale earned $2.3 billion. These earnings are vital, covering 37% of Harvard's budget and 34% of Yale's, underscoring the critical role of endowment income in sustaining these institutions.

Both Harvard and Yale had humble beginnings. Harvard established its Harvard Management Company (HMC) in 1974 to manage its first endowment, starting with just $300 million in seed money. On the other hand, Yale brought in Wall Street veteran David Swenson in 1985 to oversee its endowment, which started with $1 billion. Over Swenson’s 35-year tenure, Yale’s endowment achieved an average annual return of over 13%, with its contribution to the university’s budget growing from 10% to 30%. Swenson’s exceptional management earned him the title of “the largest donor in Yale’s history” from former Yale President Rick Levin.

So, how do these universities manage such large funds? Typically, they establish separate management companies, such as HMC, and diversify their investments across a wide range of assets, including stocks, bonds, hedge funds, corporate mergers and acquisitions (M&A), and real estate. This approach mirrors private equity funds, with several dozen, if not hundreds, Wall Street alumni actively involved in fund management. Despite some universities' relatively modest fund sizes, many achieve impressive results. For example, Baylor University in Texas manages a fund of $2 billion and has seen an average annual return of 10.9% over the past five years, outperforming all but Brown University (13.3%) among Ivy League schools. The key to their success lies in creating unbiased investment portfolios that minimize risk and aim for stable returns while ensuring maximum independence for the management companies and full transparency in evaluating their results.

In stark contrast, the situation at private universities in Korea is quite different. Last year, the total accounting reserves of 291 private universities in Korea amounted to 11.3 trillion won, but most of their investment funds were placed in low-risk assets such as deposits. Only 61 universities invested 1.65 trillion won in stocks, with just 26 universities committing more than 10 billion won each. Sadly, only seven of these universities managed to generate any profit. Meanwhile, the national pension fund in Korea achieved a 13.59% return, fueled by a booming stock market.

Korean universities are currently facing significant financial challenges, largely due to a declining school-age population, frozen tuition fees, and the exodus of talented faculty members seeking better compensation abroad. Many universities are sitting on large real estate assets, which, while valuable, do not generate significant profits. Furthermore, most are restricted by government regulations, leaving them little choice but to invest in safe, low-yield assets. Given these challenges, it may be time for education authorities and universities to collaborate and develop a long-term, sustainable fund management system that ensures financial stability for the next century.