After the turn of the 21st century, the need to diversify became more pressing. It has become essential to make reliable provision for annual extraction from the endowment, chiefly but not solely for the rapidly growing bursary programme. As the extraction has steadily increased, so has the need for liquidity to meet it. Although land and buildings appreciate in value over time, they tend to provide only a modest running yield. Cash returns to fund distributions require the sale of properties, which creates a lumpy and unpredictable cash flow. At the same time, common sense dictated that it was prudent to diversify the assets in the endowment, so that not all the endowment’s eggs would be in the one agricultural basket. So it was clear we needed to increase the liquidity of the portfolio.
With increased demands on, and complexity of, the endowment, in 2009 a standalone Investment Committee was created alongside the Finance Committee, under whose aegis the endowment’s investments previously fell. This enabled not only more focus but also for the recruitment onto the committee of experienced investment professionals, whether in land or financial assets, who give freely of their time and experience, which has proved to be invaluable.
Shortly after I succeeded Mark Loveday, the first chairman of the Investment Committee, in late 2013, the endowment’s investments had a value of £165m, of which only about 13% was in financial assets, with the balance in agricultural land and residential houses. To increase liquidity and to diversify, we set a course towards a long-term equilibrium of about 70% financial assets and 30% land and buildings. We forecast this would largely be fulfilled through the gradual sale of Barton Farm and reinvestment of the proceeds chiefly in financial assets. Following review, we accelerated the transition to a more balanced, liquid portfolio by selling at full value two substantial farms which were unlikely to be good long-term investments. Unlike these, the remaining agricultural land is almost all farmed under Agricultural Holding Act tenancies, which means they can only be sold at a very material discount to open market value until the tenancies have run their courses. We are also mindful of development potential. Savills manages the whole property portfolio, in close liaison with the Bursar and his team and the Investment Committee.
Fast forward to August 2023, and the aggregate value of the endowment’s assets has risen to some £335m, a gain of close to 100% over ten years, net of the extraction taken from the endowment over the period. The asset allocation is now some 46% in financial assets, and their value has shown an approximate sevenfold increase over that period. While much of this increase is attributable to the reinvestment of the early tranches of Barton Farm, and some of it to growth in value of the invested assets, we have also been the beneficiaries of some extraordinarily generous philanthropic gifts in recent years.
Once Barton Farm is fully realised, which may take up to another decade, the endowment should be within reach of the long-term objective of plus or minus 70% in financial assets. Not co-incidentally this would place the Winchester College endowment within the same range as a cross-section of long-established Oxbridge colleges.
The financial assets portfolio is itself diversified among different asset classes. These include an investment in global tracker funds, which have served their purpose well, inter alia enabling the endowment to benefit recently from the remarkable performance of the so called Magnificent Seven tech giants (Microsoft, Apple, Meta etc), with minimal fees. In addition, assets are invested in a series of funds dedicated to more specialist areas of the market, such as private equity, which over time have been shown to outperform regular listed equities. Students of investment theory will recognise the Yale model. The financial assets are overseen by Partners Capital, whose investment approach includes a focus on sustainable investment across the portfolio as a whole.
When the Investment and Finance Committees jointly determine how much of the endowment can be ‘spent’ in any given year, they are careful to ensure ‘intergenerational fairness’. This means that the extraction should leave the value of the endowment’s investments at least constant in real terms, over the medium-term, ignoring future donations. Advice
is taken on expected future returns of the asset mix. Currently that means that each year the school draws 3.5% of the value of the endowment’s investment assets (averaged over the trailing five years).
The extraction rate of 3.5% pa is applied to the endowment net of the £65m of borrowings incurred by the school to help pay for the Sports Centre and the new Boarding Houses. The borrowings are at a blended rate, fixed for 40 years, of 2.48% pa. It is doubtful there was ever a moment since the school’s foundation when it could have borrowed 40 year money more cheaply, and it seems evident that this was a more efficient way to finance the programme than selling assets which would typically earn a higher return than this borrowing cost.
Looking to the future, the imperatives remain to attract new donations and ensure a strong investment performance. That way the commitments to both further major expansion of the bursary programme, and a financially sound school, can continue.
