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For centuries the universities of Oxford and Cambridge have been at the forefront of academia, attracting and training some of the best minds in the world. Their alumni — naturalist Charles Darwin, mathematician Sir Isaac Newton, astronomer Edmund Halley, philosopher John Locke and economist John Maynard Keynes, to name but a few — have transformed the way people see themselves and the world around them. But when it comes to managing their money, the two great British schools have badly lagged this era’s great innovators, their wealthy American rivals like Harvard University and Yale University, which have been at the cutting edge of investment management for the past 20 years.

Now, plagued by chronic budget woes, lackluster investment performance and contentious U.K. politics,

Oxford and Cambridge are looking to radically overhaul their endowment management, reduce their dependence on subsidies from the British government and replenish their depleted coffers by raising hundreds of millions from “old members,” as their alumni are known. The two schools’ vice chancellors — who essentially manage the universities — are taking markedly different approaches. At Oxford, New Zealand businessman John Hood, who has rankled some academics with his proposed governance reforms, has set out to reconfigure the university’s investment committee with an eye to recruiting new members with firsthand asset management experience. At Cambridge, British anthropologist Alison Richard, a former Yale provost, has convened an all-star investment board and charged it with the task of hiring the university’s first-ever chief investment officer, who will be expected to build an in-house team of financial experts in the months ahead.

Both leaders feel a sense of urgency. “While we’re nowhere near a state of crisis, I didn’t come back to Cambridge to preside over a slow slide into something less than a world-class university,” says Richard, 58, who graduated with a first in anthropology from Cambridge’s Newnham College in 1969 and has a Ph.D. from the University of London. “I truly believe that if we get this right now, we will be able to make a huge difference to the university for decades to come.”

Says Hood, “We have a very special mode of educating our students with small-group, tutorial-based teaching, and it is a high-cost mode of education.”

But financial endeavors of any kind — not least international recruiting drives for top-notch investment talent — are fraught with politics, especially in academia. Although Cambridge and Oxford are self-governing charitable entities, each comprises a consortium of affiliated but highly autonomous colleges: Cambridge has 31, Oxford 39. To say that the colleges are politically independent would be putting it mildly; they are their own righteous fiefdoms. Each has its own development officer, its own high-powered alumni, its own endowment, its own investment committee and its own bursar to oversee its finances — basically, everything it would need should it wish to secede.

Although this decentralized system has its strengths — it handsomely supports the one-on-one tutorials that lie at the core of an Oxbridge education — it poses the single greatest hurdle to transforming the universities’ investment cultures. Unlike U.S. institutions, where funds from different schools and university foundations are typically pooled and centrally managed, the Oxbridge colleges’ endowments have never been commingled with the universities’. Practically speaking, the system translates into 70 different pots of money managed 70 ways by 70 different investment committees and bursars, none of whom want to forfeit a smidgen of independence.

By the multibillion-dollar standards of many U.S. endowments, very few of the Oxbridge colleges are wealthy. Most have between £10 million ($19 million) and £100 million in assets under management. The universities themselves are somewhat richer. As of July 31, 2006, Cambridge’s central endowment totaled £860 million (or £1.1 billion, including the Gates Cambridge Trust, a fund for outstanding scholars that was established by Bill and Melinda Gates in October 2001); Oxford’s is closer to £717 million. Only when all of the colleges’ and universities’ funds are viewed in aggregate do they begin to reach the kind of critical mass — £3.46 billion for Cambridge and £2.85 billion for Oxford — that gives the U.S. university endowments greater freedom to make direct investments as they diversify their portfolios.

Autonomous as Oxford and Cambridge’s colleges like to be, they remain dependent on their universities’ central administrations. Profits from the central endowments help support universitywide activities and operations, including funding for academic departments, group lectures, scholarships, professors’ salaries and capital reinvestment, such as construction of expensive research labs. The Oxbridge colleges use their own endowments to cover specific local costs, such as housing, facilities maintenance, scholarships and undergraduate tutorials.

In recent years Cambridge and Oxford have been hard-pressed to keep pace with their growing costs. In the fiscal year ending July 31, 2004, Cambridge faced an operational shortfall of £8.3 million; in fiscal 2005, Richard managed to pare that deficit to £500,000 by reducing expenses across the university. Oxford would have lost £17.6 million in fiscal 2005, if not for the £22.1 million it received from lucrative Oxford University Press.

The universities’ economic challenges are all the more pronounced in light of the historical limitations imposed on their investing practices. Until 2001, when British trust laws regulating charitable investing changed, all registered charities were limited to income-yielding investments; they could not spend capital gains. Total-return investing was virtually impossible. Oxford’s central endowment delivered an annualized return of 6.7 percent over the decade through July 31, 2006, trailing the benchmark average of 7.6 percent for charitable institutions in the U.K. over the same period, according to Edinburgh-based market research firm WM Co. Cambridge did better, achieving an annualized return for the same period of 8.6 percent.

By comparison, Ivy League universities in the U.S have prospered wildly. Under the leadership of David Swensen and his investment team, Yale’s endowment delivered an annualized return of 17.2 percent over the ten years ended June 30, 2006, and now totals $18 billion. Harvard’s endowment, under the direction of Jack Meyer (president and CEO of Harvard Management Co. until he left on October 1, 2005 to start a hedge fund, Convexity Capital), achieved an annualized return of 16.7 percent for the same period and now totals $29.2 billion, the biggest in the U.S. In the fiscal year ending June 30, 2006, nearly one third of Harvard’s operating budget, or $930 million, came from the endowment.

To remain globally competitive, Cambridge and Oxford must seek more-professional endowment management. In summer 2005, Oxford vice chancellor Hood asked Sir Alan Budd, provost of the Queen’s College and chairman of the university’s investment committee, to draft an internal report examining the university’s endowment management practices. After studying the most successful U.S. endowments, Budd suggested reconfiguring Oxford’s investment committee. The key, he believes, is to recruit committee members who have active asset management experience.

“Once the new committee is in place, it will be up to them to decide how they want to move forward,” says the 69-year-old economist. “Whether that means hiring a CIO and an investment team or putting all the money into hedge funds or betting it all on the 2:30 at Lingfield Park, I cannot begin to guess.”

For her part, Richard has never doubted that Cambridge needed a CIO. She called on Swensen, her former right-hand man at Yale, to help her jump-start the process. This January, Cambridge’s finance and investment committee created a new investment board and charged it with hiring a CIO. Led by chairman Michael Dobson, CEO of global asset management company Schroders, the all-star investment board now includes John Armitage, co-founder of hedge fund Egerton Capital; Damon Buffini, a partner of private equity firm Permira; Charles Larkum, bursar of Sidney Sussex College; Douglas McDougall, a former senior partner of Scottish asset management firm Baillie Gifford & Co.; Stewart Newton, founder of Newton Investment Management; and Swensen.

The path Richard has chosen may be unapologetically American, but she knows the profound effect a strong CIO can have. Looking back on her nine years as provost of Yale, where she was second in command to president Richard Levin, she credits Swensen with routinely “saving her skin” because the revenue that flowed from the endowment enriched the activities and academic excellence of the institution. Now she is determined to find someone of Swensen’s caliber. Cambridge is expected to name its new CIO this month.

“We have got to strengthen our investment management and diversify our sources of revenue, because we do what our peers do now in the U.S., only with a fraction of the resources,” Richard says. “While I’m proud of being frugal, I’m also well aware that ultimately the university will become uncompetitive over time.”

Cambridge and Oxford are the two oldest universities in the English-speaking world. Oxford was founded in the 11th century. The student population grew sharply in the 12th century after King Henry II banned English students from attending the University of Paris. Conflicts between town and gown in the 13th century hastened the establishment of halls of residence, which later evolved into the various colleges. Some Oxford students sought refuge from resentful townspeople elsewhere: A band of scholars migrated to Cambridge, laying the foundation for Oxford’s rival school in 1209.

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