Annual Report 2009

Supplemental Information


Like other Harvard schools, HBS raises its own endowment and current use funds. The School independently budgets the use of endowment distributions to support operations according to the terms of each gift. The HBS endowment, along with those of the other Harvard schools, is managed by Harvard Management Company (HMC), a subsidiary governed and wholly owned by the University.

The HBS endowment consists of more than 1,000 discrete funds established over the years by individual donors, reunion classes, corporations, and foundations. Although most endowment gifts are made in perpetuity, allowing little or no access to principal, some allow access to principal to provide the School flexibility in achieving the purposes for which they were designated. In addition, the School occasionally draws on capital appreciation associated with prior-year gifts. Funds from these decapitalizations are used to support key initiatives in keeping with donor intentions.

Harvard determines the amount that can prudently be drawn from the endowment to spend in any given year. This calculation is based on a rigorous payout policy that reflects past endowment performance and HMC's projections of future investment returns.The University's long-term target has been to distribute between 5 and 5.5 percent of the endowment's market value annually. The distribution includes an assessment of .5 percent of the year-end market value to cover a portion of university central administration costs.

The University’s endowment spending percentage of 4.6 percent for fiscal 2009 was determined early in calendar year 2008—more than six months before the worldwide market correction began—and reflected the endowment’s strong absolute and relative performance in the preceding years. Reflecting this spending percentage and growth in the market value of the endowment, the School’s endowment distribution revenue continued to increase in fiscal 2009, rising by $19 million, or 20.2 percent, to $113 million from $94 million a year earlier.

This growth will be reversed in fiscal 2010. The absolute return on the University's pooled investments (including the endowment) was -27.3 percent for fiscal 2009, net of all fees and expenses. After including all gifts received and subtracting annual distributions and decapitalizations, at June 30, 2009, the University endowment was valued at $26 billion—down by $10.9 billion, or 29.5 percent, from $36.9 billion a year earlier. The market value of the HBS endowment, together with current use funds, decreased by approximately $900 million, or nearly 30 percent, from $3 billion at June 30, 2008, to $2.1 billion.

Consistent with its endowment goal of providing the Harvard schools with a reliable stream of operating income over the long term, the University has advised the Harvard community to prepare for smaller endowment distributions over the next few years. For fiscal 2010, endowment distribution income is budgeted to decline by $15 million, or 13.3 percent, from fiscal 2009.