The Case of Christ Church Case Study
The Endowment Model: (a) What is the endowment model? (b) What are the alternatives? (c) Is Christ Church’s strategy a good alternative?
Christ Church invests the amount they receive in donations from various sources in multiple channels to diversify its portfolio and also to minimize the risk and thus aim to maximize the returns. Endowments are done by any type of investment like liquid investments or real asset investments or even short time investments in certain places to yield return. Christ Church invests more than one-third of its kitty in real estate which is significantly higher than other US universities. Since the yield has dropped by 2%, the endowment model has to be re-thought.
And the other alternatives available To Christchurch was to invest in liquid funds so that they have the money readily available whenever required. The returns in this case or sometimes much greater than investing in the real estate. The other option available is to Christ Church is to invest in private equity which has a very high return, but the risks are also very high.
Christ church’s strategy is a good alternative because it is stable and beneficial in the long term. go the immediate field might be low compared to other mode alternatives but still, it can be diversified into multiple opportunities to increase the return.
What role does real estate as an asset class have in the endowment portfolio? What are the benefits and risks of holding real estate investments?
Real estate as an asset class plays a very stable role in the endowment portfolio of Christ Church. Though the returns have not always been as high as expected still it is always beneficial in the long run. The real estate holdings were originally received from King Henry VIII which laid the foundation for the large exposure of Christ Church’s endowment model being biased towards real estate.
There are multiple benefits of holding real estate as an asset class like the steady income which is given along with the security which it offers to Christ Church. Also investing in real estate, it gives the Christ Church multiple opportunities to expand in future whenever required may be in the form of opening a new campus or a separate department altogether. It also provides the flexibility to the institution to either sell of the amount of real estate they are holding to another company or institution to generate capital whenever required.
Along with the benefits, there are multiple risks like diminishing value of the property at some parts of the country at certain points of time. Also getting a ready buyer for any real estate asset which Christ Church is holding might be a problem. The benefit which liquid asset has over real estate is that the negotiations are much easier since there is a certain standard value going on in the country whereas real estate values vary from person to person, institute to institute. Also holding multiple real estates increases the cost of maintaining them. A huge cost is also incurred for the security of those places.
What works and doesn’t work as you see in the Christ Church College Endowment?
Though in the field of endowment it is quite hard to exactly point upon what works in the long run and what doesn’t as it fully depends on your luck and the situation of the market, but as a part of experience of Christ church that there are few things or policies that have not served them goo in the past. The primary on them will be spending on illiquid assets using hedge or fund manager. The problem that was associated with such a technique was that it took a much more investment than normal bonds and equities and there was no sure shot guarantee of profit though the manager told otherwise, and the long-term views of Christ College often were not realized by the short-term approach of these managers.
The second that truly doesn’t work is to keep endowment property laying idle in the hopes of getting a higher return. This is easily shown by the fate of Trinity college which right now earns and control twice more fund to Christ church just because it gave its lands to various industries which have now become profit making machines
Given CCC goal what would you recommend Lawrie to do?
The principle goal as can bee seen in a glimpse of reading the case is to maximize the investments and returns from these various models of endowments so that the level of returns that are earned by rival colleges like Yale can be matched and to do it in a low risk way. I believe though there are multiple more ways to increase the rate of investment but seeing the steady growth of the real estate business in UK much in contrary to the same business in US Lawrie should stick on investing in the various properties whereas the yield from the bonds in UK market has steadily decreased and always poses a threat due to the dependency on hedge managers. She should also augment this by investing in properties outside like in US where the housing market is not in a good situation but is sure to rise in the future. Almost all the investment and endowment should be targeted on getting the properties up and working and not laying idle by leasing it out. Specialized hedge funding should also be continued with priority
Given the historically low rates should Lawrie add more leverage to Christ Church portfolio?
The general comfort level of the lenders for anything related to endowment in the real estate as well as the lowest rate of interest for quite some decades that UK is boating right now creates a conductive opportunity to leverage the Christ Church portfolio. With the presently optimist outlook that the housing and property market that UK is showing provided above in the figure shows that there is truly a higher chance for the property to be appreciated and thus earning a higher return that expected. Countries recently out of the recession like US can also be seen in the same light and can be though upon about real estate investment.
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