Clare takes out unprecedented loan to invest in stock market
Clare College has borrowed £15 million to invest in the stock market. The unprecedented inflation-linked loan is due to be repaid in 2048 and the College expects to make a profit of around £36 million.
Clare has already invested £3.5 million and aims to have invested the full amount within two months. Clare’s Bursar Donald Hearn said he hoped the market would have bottomed out by then: “We think the market is going to go down a bit more, but may begin to recover once the FTSE drops below 3,250.
“We’re borrowing at an interest rate of 1%, and we’re reasonably confident of a useful profit. The money will only be invested in funds which track stock market indices, and will be globally diversified including emerging markets,” he said.
This is the first time Clare has borrowed to invest in its 700-year history. Hearn acknowledged that it was a potentially dangerous strategy, but said the forty-year time frame brought security.
“Most Colleges have a very long -term perspective, which gives them an advantage over city funds which often have a short term focus.
“Borrowing to invest, though unsafe for the medium term, is much safer over longer periods due to the magic of compound interest rates,” he said.
The College was advised to invest by alumni on its investment committee, including Norman Cumming, who runs hedge fund CR Global, and Martin Weale, head of the National Institute for Economic and Social Research. Hearn said these men were “absolutely crucial in convincing the College as a whole that this is a sensible way to go”.
The investment is part of the College’s long term financial plan, with which it hopes to safeguard bursaries and the supervision teaching system. Hearn said there was a “high chance” that the government would stop funding supervisions in the future”.
“With a very long term view there is a probability that the supervision system might be one of those extra costs which is cut. We think it is extremely important. The more that Colleges and the University can build up their own financial strength, the better,” said Hearn.
Research undertaken by Clare’s investment committee suggests that the worst return on stock market investment over any forty-year period was 2.5% in real terms, even in times of depression or war. The College expects a 4.1% real return, assuming inflation conforms to market expectations of 3% per year.
Hearn emphasised that the timing of this investment was essential, and that the College was exploiting what he thought was an anomaly in the markets. “Pension funds are screaming out for money, particularly index-linked assets. We have been able to take advantage of that enormous demand, which has forced down the rate of interest we are expected to pay considerably,” he said.
Clare is also encouraging its students to dabble in the stock market: last year it lent £10,000 to a group of students who wanted to start an investment club.
Chris Robinson
Last updated: Friday 7th November 2008, 09:51 GMT
