College Lesson

As the oldest existing corporation in the Western Hemisphere, Harvard University can teach many a sharp financial lesson to managers of industrial pension plans and other big investment funds. With the notable exception of John Hancock,* Harvard treasurers have usually invested the corporation's money wisely. Last week, in the Harvard Alumni Bulletin, Treasurer Paul Codman Cabot gave the first detailed explanation of the investment philosophy that has helped build Harvard's General Fund (endowment) to more than $250 million, biggest university fund in the U.S.

The history of Harvard investment follows the economic pattern of a developing America. Harvard grew up with the country and helped it grow. When its investment in the Middlesex Canal had to be written off as a "Doubtful and Desparate Debt" because a newfangled steam railroad took all the business, Harvard moved fast to keep up with the changing times. It bought railroad bonds. As the New England textile industry grew up in its backyard, it saw another opportunity: such big companies as Pacific

Mills and Amoskeag Mills were partly built with Harvard money.

When the Civil War brought inflation, Harvard quickly hedged; it sold its fixed-income securities, invested in real estate. By 1881, some 40% of the university fund was tied up in land, including such choice morsels as the Boston corner lot which is now the site of Jordan Marsh Co., New England's biggest department store. Not until Boston Banker Charles Francis Adams became treasurer in 1898 did Harvard start shifting from real estate to common stocks. When the 1929 Wall Street crash put many good securities on the bargain counter, Harvard bought stocks faster than ever (see chart), now holds $112 million worth.*

In buying common stocks, Harvard trustees have "generally recognized the danger of improperly reaching for income," i.e., buying speculative securities for their high dividend return rather than sounder securities with lower returns. They have further delivered themselves from temptation by arbitrarily paying the college a stated income on endowments (4.2% this year), putting the excess in a reserve to draw on in bad years. Thus, they are less tempted to take flyers in search of high, short-term returns. Treasurer Cabot hopes to add to the reserve, which last year totaled $5,687,009, until it equals one year's investment income (last year: $7,500,000). Thus, the fund (which contributes only 25% of the income needed to run Harvard) will take much of the dividend uncertainty out of common stock investment, have enough to tide it over bad dividend years.

*Hancock slipped off to the Continental Congress in 1774 with the university's treasury. He ignored pointed suggestions that he resign, surrendered -L-16,000 of the treasury' funds only when Harvard sent a tutor to Philadelphia to collect them. Not until Hancock died 16 years later did Harvard recover all its property. *Some Crimson-held blue chips in the 1950 portfolio: $3,000,000 of General Electric Co. (74,000 shares), more than $1,000,000 each of Union Carbide, Standard Oil Co. (New Jersey), American Telephone & Telegraph, Seaboard Oil, Texas Co., Texas Pacific Coal & Oil, Illinois Power, Niagara Mohawk, Ohio Edison.

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