A year is a significant amount of time for those involved in the finance industry, where share prices rise and plummet and financial institutions face the risk of collapse. However, at prestigious Cambridge University, the concept of one year is considered a mere blip in financial history. The brightest academics in the country are confident that the good times will roll again.
Clare College at Cambridge University is seizing the opportunity to benefit from the current economic crisis by borrowing money for the first time in its 700-year history. The college has borrowed £15m for a 40-year inflation-linked loan in the hope that this savvy investment will bring a hefty profit of £36m at some time in the distant future. The decision to invest was based on advice given by the college’s wealthy alumni.
The college has managed to squirrel away £15m, thanks to its long-term perspective. Clare College looks forward to at least another 700 years of existence, which means there is little concern with achieving short-term gains. "Because we have a very, very long term perspective – we’ve been around for 700 years and plan to be around for at least 700 more – we have the advantage of not worrying about short term thresholds," explains Donald Hearn, the college’s bursar.
The money was borrowed at an incredibly low-interest rate of 1%, which is adjusted for inflation, making it a groundbreaking deal for a British or American college. Clare College plans to invest the funds in severely undervalued stocks and shares, hoping for a good return on investment. In comparison, Imperial College and Sheffield University have both taken long-term loans, but purely to fund capital projects, with traditional payback terms of 50 and 40 years, respectively.
This innovative transaction is the result of sage advice from several of Clare College’s notable alumni. These individuals include Andrew Smithers, investment expert and consultant, and committee member at the college; Norman Cumming, head of the CR Global hedge fund and investment committee member at Clare College, and Martin Weale, head of the National Institute of Economic and Social Research. The notion was also discussed with David Swenson, Yale’s chief investment officer, who is a Clare fellow and alumni. The college recognizes that their alumni played a crucial role in approving the investment.
The college’s expected profits are significant compared to Cambridge University’s total loss of £11m due to the Icelandic bank collapse. Oxford University’s losses could be more substantial, estimated to reach £30m. Regardless, these losses are minimal compared to the universities’ respective annual cash deposits of £600m and £3.4bn endowment fund.