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Harvard University's endowment delivered its worst investment performance since 2009, and its interim chief warned in an annual report that "returns could be muted for some time to come."

The 2% loss for fiscal 2016 fell short of the university's goals and contributed to a $1.9 billion drop in the value of the world's wealthiest endowment. Harvard Management Company, as the endowment is formally known, now manages $35.7 billion. It provides more than one-third of the university's operating budget.

The pullback, the largest since a 27.3% loss during the last financial crisis, is the latest setback for an institution that has struggled with leadership changes and lagging performance when compared with its Ivy League peers. Harvard Management's board is currently searching for its fourth chief executive in a decade following the July departure of Stephen Blyth, who left after 18 months in the top job.

Harvard's losses for the year ending June 30 reinforce the challenges facing all college endowments as they wrestle with volatile global markets and a sustained period of low interest rates around the world. College and university endowments tracked by Cambridge Associates posted net returns of -2.7% for the year June 30. The S&P 500 gained 3.25% during the same period, according to FactSet.

"With a backdrop of slowing growth and rich valuations, endowment returns could be muted for some time to come," Harvard Management interim chief executive Robert Ettl said in the endowment's annual report released Thursday.

Harvard Management's next top boss will take a hard look at how to improve the institution and review where internal management needs to be discontinued, reduced or scaled up, said people familiar with the matter. Harvard's reliance on internal managers is unusual among its peers. Most, like Harvard rival Yale University, farm out nearly all their assets to outside managers.

Harvard attributed the drop in its fiscal 2016 performance to losses in its holdings of public equities and natural resources. Both portfolio categories were down 10.2% for the full year. Decisions to tilt certain asset classes above or below targets also dragged down returns.

The performance of stocks tied to U.S. and developed economies fell short of the endowment's targets. Mr. Ettl said in a letter that "a number" of external equity managers "underperformed for the first time in many years."

Write to Dawn Lim at dawn.lim@wsj.com

(END) Dow Jones Newswires

September 22, 2016 17:25 ET (21:25 GMT)

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