Cambridge Enters U.K. Banking Business to Lift Endowment
Since its founding in 1350, Trinity Hall, one of the University of Cambridge’s 31 colleges, has endured the plague and the English Reformation. Now it is taking on the banking business.
Last year, Trinity Hall teamed with a local pension fund and founded Cambridge & Counties Bank to bolster its endowment. The school’s bursar serves as bank chairman. The college is risking its investment as well as its reputation in the hopes of a big return.
“The perception coming into this process was that banking was a casino business,” said Simon Guest, an engineering instructor at Trinity Hall and member of the investment committee. “If you stepped back and looked at the big picture, you saw that this could be a highly successful investment and the rather strong possibility that the college would make a great deal of money.”
Making money is increasingly important for Cambridge and its colleges because of U.K. cuts to higher-education spending. Cambridge now gets about a third of its funding for teaching and research from the government, down from half a decade ago. Along with increased fundraising, the colleges are becoming more creative in their investing. In some cases, such as Trinity Hall’s, it means venturing into areas once unheard of for conservative academic institutions.
“We’re starting to look more like an Ivy League, American university, with a mixed-funding regime,” said Martin Daunton, master of Trinity Hall and professor of economic history. “The university needs to be more reliant on its endowment and diverse in its investments. Its colleges have to do the same.”
The endowments of the colleges are collectively valued at about 3 billion pounds ($4.65 billion) while the university’s separate endowment is 1.9 billion pounds. The funds are dwarfed by those at Harvard University and Yale University -- the wealthiest U.S. schools -- at $30.4 billion and $19.3 billion, respectively, as of June 2012.
Since the 2008 financial crisis, which cost U.S. endowments 23 percent of their value on average in fiscal 2009, colleges there have struggled to regain their lost wealth. In the year ended last June, fund values fell 0.8 percent after gaining 18 percent a year earlier, according to Commonfund and the National Association of College and University Business Officers.
Building up assets at Cambridge was a primary goal of former Vice Chancellor Alison Richard, who headed the university from 2003 to 2010 after serving as Yale’s provost.
“From the day I arrived in Cambridge, my mantra was that we needed to diversify its income,” Richard said. “It’s not healthy for an institution to be too dependent on any single source, whether it is government or the endowment.”
In 2011, the U.K.’s government unveiled a plan to reduce state spending on higher education and shift more of the costs to students through tuition increases and a loan program.
Cambridge’s investors have learned from the experiences of U.S. colleges, said Nick Cavalla, chief investment officer at Cambridge. Universities including Harvard, Princeton and Stanford were heavily invested in illiquid assets such as private equity and ran low on cash during the credit crunch.
“I wouldn’t want to get as illiquid as U.S. universities,” Cavalla said. They “are in extreme positions.”
Cavalla manages the investments of the central university, while most of the colleges oversee their own endowments. Only 1.7 percent of the university’s fund is in private equity, which can have high fees and erratic returns, he said. An additional 6.3 percent is in other illiquid investments, he said. That compares with about 34 percent in private equity at Yale, according to the New Haven, Connecticut-based school.
If universities that invest in private equity and other illiquid assets can withstand events like the financial crisis, the strategy will pay off in the long run, said John Griswold, executive director of the Commonfund Institute, the research arm of a money manager for nonprofit groups in Wilton, Connecticut.
“The endowment model has been one of the most successful long-term portfolio strategies that anyone has ever invented,” Griswold said. “It’s a little unfair to pick a two- or three- year time series and say it doesn’t work.”
Trinity Hall’s finances are administered by its bursar, Paul ffolkes Davis, a former investment banker at NM Rothschild & Sons Ltd. who has helped the college’s endowment grow to more than 100 million pounds from 45 million pounds when he arrived in 2004.
Davis said investing in the bank appealed to him because many U.K. banks stopped making loans to small and medium-sized businesses after they were bailed out by the government during the financial crisis.
“There was a market for a lender,” Davis said. “The prospect of doing something that had a good local feel and was profitable was something that I was interested in.”
All U.K. colleges and universities have benefited from a 2001 change in charity law that meant endowments no longer had to hold only income-producing assets, such as land and dividend- paying stocks. They became free to invest on a “total-return” basis and focus on building capital, said Andrew Reid, Cambridge’s director of finance.
“If there are more investment opportunities available to you, then clearly the more chances you have of making a serious gain,” Reid said.
Cambridge, founded in 1209 and about 60 miles north of London, is a confederation of its colleges. The colleges own their campuses, hire staff and admit students using university guidelines. Teaching and research is shared by the colleges and university departments, while Cambridge grants degrees.
Cambridge created the first-ever internal investment office at a U.K. university in 2006 and hired Cavalla from Man Group Plc to run it. The University of Oxford followed with its own investment officer in May 2007.
Under Cavalla, Cambridge’s endowment has almost doubled, growing from 1 billion pounds. The university relies on withdrawals from the fund for about 6 percent of its 1.4 billion-pound operating budget, Reid said.
Six of Cambridge’s colleges invest some or all of their assets with Cavalla. The rest have their own strategies, some of which they have pursued for centuries.
“Because they are all largely autonomous and because they have very smart people in many places, there is a huge amount of experimentation that goes on among the colleges,” Richard, the former vice chancellor, said. “Colleges have been very successful investing in real estate, very shrewd.”
Cambridge’s move to hire an internal fund manager has critics. The endowment would do just as well in a portfolio of blue chip stocks that wouldn’t risk losses, said Ross Anderson, a Cambridge computer scientist who objected to creating the role when he sat on the university’s governing board.
“I’m concerned that we’re wasting money on the office that we didn’t need,” Anderson said. “Let’s allocate the money by buying appropriate index funds.”
He pointed to the fallout at U.S. universities, which fired staff and froze faculty searches, when they suffered losses during the financial crisis.
“Gross financial mismanagement results in faculty layoffs,” he said. “We haven’t yet seen a disaster. But if there is a disaster, we don’t have anyone else to blame.”
Even amid warnings such as Anderson’s, Cambridge and some of its colleges are becoming more ambitious in their investing strategies.
Trinity Hall bought a 50 percent stake in Cambridge & Counties Bank’s assets and liabilities for less than 5 million pounds, according to Davis, the bursar, who wouldn’t disclose the exact amount. The Cambridge county government’s pension fund owns the rest.
The bank’s assets had been owned by Vladimir Antonov, a Russian who was prevented from operating the bank in the U.K. by the government’s financial regulator, Davis said. Antonov and an associate have since been accused of stealing about $659 million from another bank he owned in Lithuania. Kevin Gold, Antonov’s lawyer, didn’t respond to requests for comment.
Cambridge & Counties, which received its license in June, is expected to become profitable by the end of the year, according to Davis, who said the college receives a portion of his compensation as bank chairman. He didn’t disclose the amount. The bank had 74 million pounds in deposits when it began operation last year, he said.
The college established a Board of Scrutiny to examine the bank’s activities and sit in on bank board meetings.
“We want the bank to be an old-fashioned, boring institution,” Guest said. “We want to avoid any temptation to go into more exotic types of business.”
Trinity Hall hopes to build its endowment up to the level of its neighbor, Trinity College, a separate institution with investments of 883 million pounds. With about 900 students, that school’s assets of $1.52 million per student make it richer per student than Harvard.
Trinity College’s wealth derives partly from Henry VIII, who founded the school in 1546, endowing it with land he seized from Catholic monasteries after his break with Rome. Former students include Isaac Newton, Lord Byron and Jawaharlal Nehru.
For centuries, most of Trinity’s wealth has been in real estate. Holdings now include some of the land beneath the Port of Felixstowe, the busiest container port in the U.K.
Trinity College spent 24 million pounds in 2009 to buy a 999-year lease for 32 acres in London that includes the O2 Arena, the world’s most-visited music venue. The arena, operated by Anschutz Entertainment Group Inc., pays the college rent based partly on ticket sales, said Rory Landman, a former hedge fund manager hired as bursar in 2006. The rent amounted to 1.6 million pounds in 2009, and the college expects the investment to return about 7 percent a year above the inflation rate over the next 50 years, he said.
Investing on behalf of an almost 500-year-old college lets Landman look beyond the risks of recessions and cyclical downturns, he said.
“It’s a huge competitive advantage,” he said. “We can look across the valley.”
Trinity College funds 75 percent of its budget from its endowment, which generates about 30 million pounds a year. It also contributes 7 million to the greater university, some of which is distributed to less wealthy colleges.
Trinity College’s success in investing may have spurred the other colleges to try and catch up, Richard said. In the case of Trinity Hall’s bank investment, the hope is one day “it could become a Felixstowe,” Davis said.
“This was too good an opportunity to miss,” Davis said. “I know banks make money. This one will make money.”
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