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By Stephen Mihm
(Bloomberg View) --Let us weep tears of sympathy for Harvard University. On Tuesday, the nation's oldest - and arguably, most distinguished - institution of higher learning announced that its vast $37.1 billion endowment had earned a paltry 8.1 percent return over the past fiscal year. Harvard glumly described the results as "disappointing and not where it needs to be."
Most fund managers would probably spin these results as a modest success. But Harvard's endowment isn't your normal investment vehicle. And it's hardly alone: Many elite universities and foundations post double-digit returns year after year, making them the envy of Wall Street.
So how did "nonprofits" become so profitable? The standard answer is that star managers like Yale's David Swensen are responsible. But the real story comes considerably earlier, when universities and foundations first adopted a more aggressive stance toward building wealth, overturning centuries of tradition.
To put things in perspective, consider the state of elite endowments in the 19th century. Though hard figures are hard to obtain, Harvard's war chest didn't crack a million dollars until mid-century, and even as late as the 1870s, it was still stuck around $2.5 million. The painfully slow growth of the endowment was a reflection, in part, of Harvard's desire to shield its capital from even the smallest hint of risk.
Some measure of this conservative attitude can be gleaned from a famous court case decided in 1830. The will of a wealthy merchant stipulated that his fortune be managed by a group of trustees while his wife was still alive. On her death, the money would pass to the university. When it received the bequest,...