Even Harvard’s Feeling the Pinch

Harvard president Drew Faust is worried about the university’s endowment:

As a result of strong returns and the generosity of our alumni and friends, endowment income has come to fund more than a third of the University’s annual operating budget. Our investments have often outperformed familiar market indexes, thanks to skillful management and broad diversification across asset classes. But given the breadth and the depth of the present downturn, even well-diversified portfolios are experiencing major losses. Moody’s, a leading financial research and ratings service, recently projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.

Isn’t the whole point of an endowment that it goes up so much in good times that it can see you through lean times? In a worst-case scenario Harvard will still have a substantial eleven-figure endowment to its name, whose annual changes in value, both up and down, are significantly larger than the university’s funding needs through the rest of this recession. The Harvard endowment has been a first-rate investor; it would be sad indeed not to take advantage of that fact when times are tough.

But the wealth effect works two ways: a first-order "I’m wealthy, I can spend money", and a second-order "I’ve made money, I can now spend it". Faust is clearly being hit by second-order effects: since the endowment probably hasn’t made money this year, she feels shy about spending as much of it as she has in the past. If I were Jack Meyer, who made the endowment so large that she never needed to worry about such things, I’m not sure how I’d be feeling right now, on reading her speech.

On the other hand, it’s entirely possible that Faust is using endowment losses as an excuse for making cuts she’s been wanting to make for a while but found politically difficult to announce, much as governments take advantage of crises to push through necessary-but-unpopular legislation.

I’m also interested in why Faust is going off of some Moody’s report on college endowments generally, rather than the performance of the Harvard endowment in particular. Is she incapable of picking up the phone and seeing how it’s doing? Is there any good reason why she should keep that information confidential? The endowment does release its returns on a regular basis; there might be some reason why its managers don’t want her to jump the gun at all, but I can’t off the top of my head think of a good one.

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