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Managing the School's Gifts and Endowment

As with other Harvard University schools, HBS raises its own endowment and current use funds, and independently budgets the use of its endowment distributions to support operations, according to the terms of each gift.

Reflecting both strong investment return and new endowment gifts, in fiscal 2007 the combined market value of the School's endowment and current use funds grew by $481 million, or 20.5 percent, from $2.3 billion a year earlier to $2.8 billion at June 30, 2007. This $2.8 billion represented 8 percent of the total University endowment.

The market value of the HBS endowment and current use funds has grown at a compound annual rate of 16.1 percent for the past five years. Mirroring this growth, investment return on the endowment has become an increasingly important source of operating income for the School.

Since fiscal 2002, endowment distributions for operations, together with revenue from unrestricted current use gifts, have risen at a compound annual rate of 10 percent—significantly faster than inflation in higher education—from $59 million, or 20.6 percent of the School's total revenue, to $95 million, or 23.4 percent of total revenue, in fiscal 2007.

The School's endowment consists of more than 1,000 discrete funds established over the years by individual donors, corporations, foundations, and reunion classes. The assets in these funds were intended to be preserved for the benefit of many generations. Approximately 93 percent of the funds are designated, or “restricted,” by the donors for specific uses, and must be spent according to each donor's intent.

Most endowment gifts are made in perpetuity, allowing little or no access to principal. Some, however, allow access to principal to provide the School flexibility in achieving the purposes for which they were designated. HBS also uses the principal and capital appreciation associated with prior-year gifts in line with donor intentions to support key initiatives.

Approximately 50 percent of the HBS endowment has been earmarked by the donors to support professorships and faculty research, and 25 percent is in funds designated to provide income for MBA and Doctoral student fellowships. Another 18 percent is restricted to existing strategic initiatives, building operations, and other ongoing operations of the School.

The remaining 7 percent of the HBS endowment is available for discretionary investment in new opportunities. For this reason, annual unrestricted gifts remain the School's primary funding source for new initiatives. In fiscal 2007, income from unrestricted current use gifts totaled $17 million, or 4.2 percent of total revenue. These funds are used to nurture and accelerate new programs that are not endowed, and to support the School's emerging initiatives in research and teaching.

The assets within the HBS endowment, along with the University's other endowments, are managed by Harvard Management Company (HMC), a wholly owned subsidiary of the University. HMC was founded in 1974 to manage the University's endowment, pension assets, working capital, and deferred giving accounts. The President and Fellows of Harvard College appoint a Board of Directors that governs HMC.

The HBS endowment works like a trust fund. The assets are managed to ensure that growth in the purchasing power of the gift principal exceeds the long-term rate of inflation. This means that great care must be exercised in determining the amount that can safely be drawn from the endowment to spend in any given year.

Each year, the University determines the aggregate amount to be distributed from the endowment according to a disciplined annual payout policy that reflects HMC's projections of future endowment returns. The investment goals are to fund current initiatives while preserving principal, to protect the purchasing power of the endowment from erosion by inflation, and to build capital for the future by achieving superior risk-adjusted returns.

Given these goals, the University's long-term target has been to distribute between 4.5 and 5 percent of the endowment's market value annually. Following the endowment's strong investment returns from fiscal 2003 through 2005, the University chose to embark on a long-term program of supplemental distribution increases beginning in fiscal 2006. The University may now authorize distributions up to a level of 5.25 percent in the next several years.

These additional funds are designed to support increased spending on the highest strategic priorities at each of the Harvard schools. The supplemental distribution available to HBS for fiscal 2007 grew to approximately $2.5 million, from $1 million last year. As in fiscal 2006, the School used these incremental funds to provide additional fellowship awards.

After including all gifts received, netted against annual distributions, at the end of fiscal 2007 the University endowment was valued at $34.9 billion, compared with $29.2 billion at June 30, 2006. The University's total investment return for fiscal 2007 amounted to +23 percent, net of all expenses and fees. The absolute return this year exceeded the average annual returns the endowment achieved over the past five and ten years of 18.4 percent and 15 percent, respectively.

bar chart of Gifts Received bar chart of Cash from Gifts bar chart of Endowment Growth

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