Message from the CEO
OCTOBER 2018

Dear Members of the Harvard Community,
For the most recent fiscal year ended June 30, 2018, the return on the Harvard endowment was 10.0% and thevalue of the endowment was $39.2 billion. The gain was primarily driven by private equity and public equity
exposures. The endowment also distributed more than $1.8 billion toward the University’s operating budget.

Performance
Asset Class

July 1, 2017 Allocation

HMC Return

Public Equity

31%

14%

Private Equity

16%

21%

Hedge Funds

21%

6%

Real Estate

13%

9%

Natural Resources

6%

(2)%

Bonds/TIPS8%

1%

Other Real Assets & Private Debt*

2%(1)%

Cash

3%

0%

100%

10%

Endowment*This group comprises residual private investments of the former public internal platform, excluding natural resources.
It also includes non-private equity investments of the former private equity silo.

While we are not pleased with this performance, we are mindful that ours is an organization and a portfolio
in transition. A quick look at our asset group returns makes two issues clear. First, there are certain parts ofthe portfolio that need work. We understand this shortcoming extends beyond a single year’s performanceand are hard at work to improve those asset classes for the future, as we are working to improve every partof the portfolio and will always do so. Second, looking beyond the returns of individual asset classes, asset
allocation — or risk level — was the dominant factor in the overall returns. In general, the higher the risklevel, the higher the return.
All of this said, as sophisticated investors well know, there are very limited conclusions that we can draw
from a single year of either manager performance or asset allocation. Indeed, such superficial focus can leadto unwise or even dangerous conclusions. Had this past year’s return been significantly higher or lower, itstill would not be reflective of the work we are undertaking, nor change the path we are pursuing. This isa reality that will apply to the remaining years of our transition as well. As I told HMC’s Board prior toaccepting this position and have stated in previous letters, the significant changes we are undertaking requirea five-year timeframe to reposition the organization and portfolio for subsequent strong performance. At
the close of this past fiscal year, we were 19 months into the execution of the plan and we remain focusedon implementing that strategy.

October 20181

Review of Progress
High-quality people, culture, and investment processes drive top long-term returns, just as they did at theendowment I previously led. Short-term returns should never drive long-term strategy.
Accordingly, in addition to our focusing on the portfolio, significant attention is paid to our people, culture,and processes. Since I have discussed those at length in the past, I will not belabor them here. Rather, I will
provide a brief update on what we have done to progress organizationally.

Internal Platform•	Early in fiscal year 2018, we spun-out two relative value platforms, supporting both with investment.
•	As was well publicized, we spun-out our large internal real estate platform to Bain Capital. We arepleased that the former HMC real estate team is now at Bain and that they continue to manage a sizable
pool of capital on HMC’s behalf.

•	This past spring, we also spun-out our credit platform, supporting it with investment.
•	The natural resource team is now the sole internal platform at HMC. This team has made great progressin their multi-year repositioning of the portfolio, selling certain assets and improving the managementof others.

The Generalist TeamThe HMC Generalist Team was officially formed just prior to the start of fiscal year 2018 and has, therefore,
been functioning for over a year. While some team members have been trained as generalists, others bring
deep specialist experience. The investment framework and accompanying analytics we are developing serveas our common language.
While it will naturally take a few years for talented specialists to develop fully as generalists, our early progresshas exceeded my expectations. Furthermore, HMC’s investment and organizational cultures are evolving tofoster the kind of internal discussion and debate needed to support thoughtful investment decisions.

Critical Frameworks•	We have developed our fundamental investment framework and completed most of the accompanying
analytics. We continue to evolve and improve them, as we always will.
•	O ur portfolio liquidity framework was developed over the course of fiscal year 2018 and plays a criticalrole in our management of the portfolio. Importantly, we are now engaged in highly collaborative anddeep discussions with Harvard’s vice president for finance, Tom Hollister, his colleagues, and the HMC
Board to ensure that we best serve Harvard’s needs.
•	O ur risk framework was completed over the course of fiscal year 2018. As planned, it provides animportant guidepost for our portfolio. We will soon engage the HMC board of directors in conversation
to determine Harvard’s risk appetite. Based on past experience, I would expect this to be at least a twoyear exercise.

October 20182Looking Ahead
While my first 19 months at HMC have featured some unkind surprises, there has been one especiallywelcome discovery: HMC has an extraordinarily talented, skilled, and dedicated team on both theinvestment and support sides. If I could pick the one asset on which to build an organization, this would
be it. It is therefore our opportunity, our obligation, and well within our capacity to effect this turnaroundand generate long-term success for Harvard.
I often hear the opinion that HMC’s endowment is too large to generate attractive returns, but as peer
endowments with similar assets under management have shown, the size of the endowment is no excuse
for muted returns.
As I have stated before, we are in the midst of a five-year transition. Developing our investment team
into generalists, building the systems to support our investment framework, and repositioning theportfolio — reducing exposure to certain illiquid assets, while building exposure to others — takes years tocomplete. We are constantly looking to evolve and improve, but the basic plan has not and will not change.
Therefore, observers should not expect future letters to recount dramatic changes.
Our work continues apace to position HMC for long-term success and ensure that Harvard University has
the means to continue its vital role as a leader in teaching and research for future generations.
Best regards,

N.P. “Narv” Narvekar
Chief Executive Officer

October 20183