Oxbridge investors fail to win glittering prizes
Jonathan Davis says that if Britain’s ancient universities want to remain world-class, they should take tutorials from Harvard and Yale in how to invest their endowments Devotees of the diaries of Harold Nicolson and Alan Clark will feel that they know the cramped apartments at the Albany in Piccadilly as a vicarious second home. It was there that both men would repair after dining and gossiping in clubland; there also, the reader is led to assume, that their extramarital assignations would be consummated. But how many of the millions who pass the Piccadilly entrance to the Albany have ever stopped to wonder who owns the elegant building in which these famous bachelor sets are located? The answer, it turns out, is Peterhouse, the oldest Cambridge college.
In fact, so valuable is the property that it singlehandedly accounts for almost 40 per cent of the published value of the college’s £75 million endowment. Such a concentration of wealth in just one asset stands as an affront to conventional investment wisdom, which emphasises the value of diversification across a range of asset classes. Even by Oxbridge standards, Peterhouse is exceptional, having fully 85 per cent of its investment portfolio tied up in real estate — with the remainder in shares and virtually nothing in bonds, let alone anything as fashionable as hedge funds, commodities and private equity. But the college can invoke no less an authority than John Maynard Keynes to justify its high-focus investment approach.
As bursar of King’s, just up the road, Keynes famously pursued a high-risk (but rewarding) investment strategy with college funds in the 1930s — at one point, according to legend, narrowly avoiding having to take delivery of a large consignment of wheat on whose price he had been speculating in the derivatives market of the day. Keynes’s view — later shared by Warren Buffett, America’s most famous investment sage was that ‘the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in management in which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows too little and has no reason for spe cial confidence’. This highly personalised approach may work well if you happen to have a genius on hand, but as a general recipe for investment success it’s unlikely to produce optimal results. Modern investment practice favours diversification and risk control — and for all the brainpower that the 70 Oxbridge colleges can call on, the performance of their endowments, taken together, has in practice been lacklustre.
As they wrestle with a range of complex financial pressures, including caps on tuition fees and Gordon Brown’s infamous raid on dividend tax credits (which hurt educational charities every bit as hard as pension funds), colleges have been forced to embrace new investment thinking. The retired-officer bursar, barking down the line at the college’s land agent, is gradually disappearing in favour of a new breed of professional managers. New legislation has meanwhile given all charitable institutions much greater freedom in the ways they can invest.
Spurred on by envy at the huge success that Harvard and Yale have had in managing their endowments, both universities have also embarked on a radical overhaul of the way they manage their central funds. If you take the £1.6 billion of central funds that Cambridge and Oxford together command, plus the published figures for college endowments — £3.4 billion at Cambridge, £2.8 billion at Oxford — it adds up to a sizeable pot, though not all colleges include property in the figures, which also exclude works of art and other treasures. The total may be barely half the size of the endowments of the leading privately funded Ivy League universities, but both Oxford and Cambridge in aggregate have more at their disposal than every publicly funded university in the United States bar one. While financial imperatives demand that colleges maximise the value of their endowments, the problem is that the obvious solution of pooling resources in one professionally managed fund — as at Yale and Harvard — runs counter to the concept of self-reliance that individual colleges so jealously guard.
In practice, as Shanata Acharya and Elroy Dimson of London Business School emphasise in the first comprehensive study of Oxbridge investment practices, published this month, it’s impossible to generalise about the way different colleges invest. ‘Their considerable individualism,’ the two academics observe ‘can best be described as the Galapagos Islands of the investment world’ — by which they mean that every type of approach has been or is being tried somewhere, with varying degrees of success. Approaches to risk control, they drily note, often appear to be ‘more artistic in nature’ than ‘scientific or quantitative’.
Many colleges are for historical reasons heavily exposed to property; some hold none at all. At the opposite extreme to Peterhouse is Balliol, which took a strategic decision to sell all its directly owned property 20 years ago. Only a small minority of colleges have embraced the methods of Yale and Harvard and plunged into hedge funds and private equity — in which the Ivy League universities have done very well.
Of those colleges that have embraced equities in a big way, surprisingly few adopt a passive, indexing approach. Even fewer use derivatives — the surprise being that both indexing and derivatives strategies are rooted in academic innovation that you might expect to find favour with Britain’s two most distinguished universities.
A lack of comparative data makes it difficult to establish how many colleges are doing a good job with their endowments. While some, such as St John’s, Cambridge, have posted exceptional returns, a good guess is that in aggregate Oxbridge has lagged the returns of Harvard and Yale by around 8 to 10 per cent per annum over the past decade.
Had it performed as well as its transatlantic counterparts, Oxbridge collectively would have had at least twice as much money with which to pay the salaries needed to attract the best academics and ensure long-term independence from the state. One problem many colleges face is that their endowments are too small to make them credible players in areas such as private equity, where deep pockets are needed to buy into the best funds. In addition to overhauling the way their own endowment funds are run, both universities are seeking a solution to this scale problem by encouraging colleges to participate in pooled funds.
Such initiatives don’t always go down well with college investment committees, for whom anything that smacks of centralisation is instinctively a no-no. Cambridge vicechancellor Alison Richard has opted for the Yale route, establishing a high-powered university investment committee and appointing for the first time a full-time chief investment officer — Nick Cavalla from the Man group, who takes up the post this month — to oversee central funds and create pooled vehicles for colleges to join if they wish.
At Oxford, traditionally the more fractious place and with a slightly smaller endowment, the university has also created an investment committee composed mainly of professional investors drawn from alumni lists, but has stopped short of establishing a full-time professional investment office. Three colleges have backed the formation of a new venture which aims to offer all Oxford colleges access to sophisticated new investment funds. Behind all these initiatives lies a simple notion: that if Oxford and Cambridge are to remain world-class institutions, they need to invest their money in a world-class way — something they have collectively failed to do in recent years.
Jonathan Davis edits Independent Investor.
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