Special Message from the Treasurer Q & A with Jennifer Pline, Managing Director, Harvard Management Company

What are the investment results for the endowment?

The 2007 fiscal year yielded strong returns for the Harvard endowment, which returned 23.0 percent, versus 17.7 percent for the TUCS Median (1) and 17.2 percent for the policy portfolio. Returns were significantly above the longterm averages. The absolute return is also considerably greater than the long-term expected return for HMC, and will result in endowment distributions to the University of $1.1 billion this year—more than three times the level distributed 10 yearsago. July and August were quite volatile, and market volatility has caused some investment manager failures, including Sowood Capital Management. The Sowood-related losses, as well as the more general impact of financial market dislocations, were offset by gains attributable to the overall positioning of the portfolio, including a number of market hedges implemented in the context of our overall risk management process. The endowment also benefited from a high degree of diversifica- tion among internal and external portfolio managers and strategies. The net result was solid performance during these months.

What’s new at HMC?

At the top of the list are the excellent investment returns that were achieved for fiscal year 2007. Second is the search for a new CEO, since Mohamed El-Erian is moving back to the West Coast for family reasons. While we are all sorry to see Mohamed go, he has accomplished a great deal over the last two years. HMC has reconstructed its internal portfolio management, covering five market segments: advanced country equities, emerging market equities, domestic fixed income, international fixed income, and foreign exchange. We also restructured the allocations to external managers, completed hiring for our compliance function, and enhanced our risk management and operational support functions. The board has been actively involved in all of these steps. We believe HMC is well positioned for the future.

What has been going on in Trusts and Gifts?

We completed an asset allocation study for trusts invested in our tax-efficient investment strategy and added some new asset classes, broadening our international market exposure and further diversifying the fixed income component. We believe this new asset allocation will improve diversification of the portfolios and continue to produce attractive returns in a volatile market environment like the one we’ve been experiencing in recent months.

“ The endowment investment option continues to be a popular vehicle for alumni and friends who wish to make a life income gift to Harvard. ” JENNIFER PLINE

We are also working on redesigning the statements we send to trust donors in an effort to communicate our results in a more readable, attractive format. We expect to roll out these new statements early next year.

What are the recent trends in giving that you’ve noticed?

We are seeing an increase in younger alumni who want to establish charitable trusts with Harvard. We’ve been looking to offer options for them and, in response, we lowered the minimum beneficiary age to 45 years for lifetime charitable remainder unitrusts established with gifts valued at $250,000 or more. The endowment investment option continues to be a popular vehicle for alumni and friends who wish to make a life income gift to Harvard.

What is your investment outlook?

Until recently, investment markets haven’t been terribly volatile, and most asset classes have been fairly valued, if not overvalued. We expect to see increased volatility going forward, resulting in returns that are closer to, or possibly even below, the long-term market averages. We believe that diversification and strong risk management will help dampen the effects of some of the anticipated volatility.

What are your thoughts about your first two years at HMC?

I love being in the nonprofit arena, and I believe in what we’re doing to further the University’s mission. I enjoy getting to know alumni and helping them meet their philanthropic goals. From an investment perspective, there is incredible freedom at HMC because we have such a long time horizon. Having the opportunity to look forward 10, 20, even 50 years is very liberating. I also have enjoyed being a part of rebuilding HMC and watching the team grow and produce great investment results—it’s incredibly gratifying.

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