Harvard Management Company
Message from the Chief Executive Officer

For the most recent fiscal year, which ended onJune 30, 2023, the return on the Harvard endowment
was 2.9% and the value stood at $50.7 billion. Theendowment also made available more than $2.2 billion
for the University’s operating budget, supporting
financial aid, faculty, research initiatives, and more.

PERFORMANCE
Fiscal year 2023 (FY23) was a year of generally muted
returns for asset classes outside of public equities.
While public markets were flat or negative during thefirst half of FY23, the dramatic equity rally during
the second half of FY23 (i.e., the first six months ofcalendar year 2023) changed the picture meaningfully.

Index

FY22TotalReturn2022
July toDecember
Return2023
Januaryto JuneReturn

FY23
Total
ReturnACWI-15.8%

2.3%

13.9%

16.5%

S&P 500-10.6%

2.3%

16.9%

19.6%

NASDAQ-23.4%

-4.7%

32.3%

26.1%

As noted in the asset allocation chart below, Harvard
Management Company (HMC) has limited longonly public equity exposure (11%) and, accordingly,
the endowment’s FY23 return does not reflect asignificant impact from public equity movements.
However, this portfolio construction also helps braceagainst significant swings in either direction, as it
did last year when the FY22 return (-1.8%) was notmeaningfully impacted by an overall double-digit
public equity decline.
Asset ClassAllocation

Public Equity
Private Equity
Hedge Funds
Real Estate
Natural Resources
Bonds/TIPS
Other Real Assets
Cash and OtherENDOWMENT

harvard university  harvard management company

11%
39%
31%
5%
1%
6%
2%
5%
100%

Strong public equity returns are often outpaced byprivate equity and venture capital. However, thereturns for these asset classes proved to be only
slightly positive in private equity and mildly negativein venture capital/growth. While this outcome may
seem counterintuitive, we anticipated a correction in
those funds’ performance in last year’s annual letter,noting that their dramatic outperformance over publicmarkets was likely due to a natural lag in how theirassets are valued.
Put another way, in FY22 private managers did not
reduce the value of their investments in a mannerconsistent with declining public equity markets.
Accordingly, those private asset managers did not
subsequently increase the value of their investmentsin the context of rising public equity markets inFY23. Given the continued slowdown in exits andfinancing rounds over the last year, it will likely takemore time for private valuations to fully reflect current
market conditions.

REFLECTIONS ON SIX FISCAL YEARS AT HMC
In FY21, HMC reported on the completion of our fiveyear restructuring of both the organization and theendowment portfolio one year ahead of schedule. We
noted at the time that the swift, broad restructuringof HMC’s operations and investment model allowed
us to focus substantially all our time on the portfolio
turnaround, which is now largely complete. We are
fortunate to have maintained a 9.2% annualized
return during that span.
There are three main components to endowment
performance: risk level, asset allocation, and manager
selection. We are particularly gratified by the second
and third components outlined immediately below.

12HMC’s manager selection alpha is one of our proudest
achievements. Over the course of the last six fiscalyears, the alpha generated by HMC’s manager
selection has been very strong, greater than we would
have anticipated. Although we are confident that HMC
will continue to do very well, it is hard to imagine thatthe next six years of alpha production can be as strongas the previous six years.
Our approach to overall asset allocation is based on
portfolio risk level. Accordingly, and as discussed ingreater detail below, Harvard engaged in a deliberate
process to analyze its risk tolerance. However,even before changing risk levels, HMC worked tooptimize its asset allocation within the University’sexisting risk constraints. We moved swiftly in a riskneutral manner to pivot from private real estate andagriculture/timber to private equities early during thisperiod. We also built a portfolio of liquid uncorrelated
funds within our overall hedge fund allocation.
These decisions proved to be successful. Within theasset classes, we also diversified into biotech (bothpublic and private markets) and significantly added totech venture.
Looking back over many years, a main constraint
on Harvard’s endowment returns has been that theportfolio was structured to take less risk than what
was likely prudent. The question of the amount ofrisk to take is not a simple one, as it must weigh, forexample, budget stability against long-term growthin the endowment. HMC built an analytical risk
framework and partnered closely with the University
to help determine the University’s risk tolerance. Afterseveral years of rigorous conversation and analysis,
the University agreed to a measured increase in theportfolio’s risk level, which HMC began implementing
over the last two years.
While we are very pleased to have catalyzed thiscritical discussion and process, we note that wecontinue to operate, even after the risk increase,at a somewhat lower risk level than many peer
endowments. Going forward, HMC will continue towork with the University to periodically review theappropriate long-term risk level and tolerance (similarto how many endowments periodically review theirharvard university  harvard management company

asset allocations with their investment committees
and university constituents).
Ultimately, we believe that the measured increasein risk — carefully calibrated to ensure long-term
endowment stability — and the improved asset
allocation (versus when we started, six years ago)
will continue to generate strong returns even if themanager selection alpha attenuates.
I would also like to highlight that HMC has started
investing in innovation related to mitigating
greenhouse gas emissions. While we have been early
in investing in this area over the last few years, webelieve that a decade from now it will be accretive toendowment performance. Innovation to reduce carbonemissions will be rewarded, as it is one of the mostobvious needs in society today.
In addition to organizational structure and portfolio
shifts, there were two other specific initiatives that weare proud to have incorporated into our operations:addressing gender and racial diversity in the financial
industry and expanding our sustainable investing
practices to meet the University’s pledge to have theendowment net zero of greenhouse gas emissions
by 2050.
HMC’s focus on diversity looks at our own team, theleadership of our asset managers, and the companies
in which those managers choose to invest. We aim
to seek talent from the broadest possible pool ofcandidates and managers. In addition to actively
seeking out more diverse managers for investment
consideration, we collect data, where available, on
the diversity of the managers’ leadership, staff, andportfolio investments. The financial industry has along way to go on this front, but we hope these steps
can play a small role in addressing this challenge.
Nearly a decade ago, Harvard became the firstU.S. higher education endowment to sign onto
the U.N.‑supported Principles for ResponsibleInvestment. Along with that commitment, HMC
formalized its Sustainable Investing Policy to ensurethat we considered all environmental, social, andgovernance factors that could impact the value of our13

investments. More recently, Harvard became the firstU.S. university to commit to making its endowment
portfolio net zero of greenhouse gases by 2050 — inline with the timeline of the Paris Agreement. In
addition to the groundbreaking work that entails, ourown operations were net zero of carbon emissions forthe second consecutive year. Doing so has not only
allowed us to hold ourselves to the same standards
we are asking of others, but also is in line with
Harvard University’s climate commitments. Ourannual Climate Report will go into greater detail on
the variety of efforts associated with our sustainable
investing initiatives and progress toward the net
zero pledge.

I am proud of our team’s ability to adapt to thisnew structure and to proactively engage with newchallenges. And we have done so while always
keeping Harvard’s mission front of mind, ensuringthat the University has the financial resources toachieve academic excellence, expand opportunities forstudents and faculty, and foster diverse educational
experiences. I am excited to see what we willaccomplish together in the years ahead.
Best Regards,

N.P. “Narv” Narvekar
chief executive officer
September 2023

harvard university  harvard management company

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