Harvard's Dear John Letter

By Lynne Munson

Harvard and I both received Dear John letters last week. Harvard's was from its endowment manager--Mohamed El-Erian--who is bolting Cambridge after just one and a half years on the job. According to the New York Times many are "stunned" by El-Erian's decision. Apparently even $35 billion isn't enough of a toychest to keep some of these hedge-savvy investment managers put.

Coincidentally, I received a letter from El-Erian just last week. It was Harvard Management Company's [HMC] annual endowment status update that is sent to "the friends of Harvard" and has long been called the "John Harvard Letter." It literally begins "Dear John."

Allow me an admission: I love these "bragging" letters. The public rarely gets a peek inside college and university endowments. And when these investment managers rave about their performance they often drop in more than a few useful tidbits of infomation. El-Erian's August 21, 2007 "John Harvard" letter was no different.

He begins by celebrating Harvard's endowment gains--up 23% in just a year's time. That's a whopper of course but stay tuned because things get a little fuzzy. HMC makes a distinction between the funds in its endowment and those in what it calls its General Investment Account. The corporation tells John Harvard readers that the current size of its endowment is $34.9 billion. But explains in the next sentence that “the total value of the ‘General Investment Account’ (GIA), which constitutes the pooled assets managed by HMC that include the endowment and related accounts, grew from $33.7 billion to $41.0 billion.”

So—what’s the difference between the endowment and the GIA? Recipients of the John Harvard letter aren’t given a definitional distinction and I doubt the IRS would get one either. As readers of this blog now, the IRS is proposing to revise the form non-profits file to include endowment size and payout infomation. But unless the IRS clearly defines what they mean by endowment and polices reporting, the information colleges and universities supply will be unreliable and incomparable. Not only do many schools—Harvard is not alone here—already have an array of fuzzily defined accounts into which they pour and manage endowment funds, but the board of any institution can redefine what it means by endowment at any time.

Requiring institutions to follow—at least in their reporting to the IRS—a specific definition for endowment will affect the accuracy of all reporting in this area. But let's get back to that letter because El-Erian included a real gem of information that further makes the point. Page two contains a passing and completely unelaborated reference to the fact that Harvard distributed $1.1 billion out of its endowment in FY2007 to support teaching, research, and student aid. Now, this sounds like a lot. But $1.1 billion constitutes either a mere 3.15% or 2.7% of the size of Harvard’s endowment, depending on which account you use as the basis for the calculation. Either percentage is well below the already alarmingly low average rate (4%)of higher education endowment spending.

It costs more than $45,000 for an undergraduate to attend Harvard annually. The price rose 4.5% just last year. The school is spending $108 million on need-based financial aid this year. That amounts to either 1/3% or 1/4% of the value of its endowment, again depending on which figure you use. This isn't real money--it is a rounding error.

Interestingly HMC recently decided to suspend the John Harvard letter, citing a desire to be more “cognizant of the need to appropriately limit what we disclose about investment strategies and vehicles.” So we'll be deprived even the scant information we've been able to glean from this annual braggadoccio.