Harvard Case - St. Thomas More College's Investment Trust
"St. Thomas More College's Investment Trust" Harvard business case study is written by Brian Lane, Brooke Klassen. It deals with the challenges in the field of Finance. The case study is 8 page(s) long and it was first published on : Feb 19, 2024
At Fern Fort University, we recommend that St. Thomas More College (STMC) adopt a multi-pronged approach to managing its investment trust, focusing on a balanced portfolio with a strong emphasis on long-term growth and risk management. This strategy will involve diversifying investments across asset classes, actively managing the portfolio, and leveraging technology and analytics to enhance decision-making. Furthermore, we recommend the establishment of a formal investment committee with expertise in finance and investing to oversee the trust's operations.
2. Background
St. Thomas More College, a small liberal arts institution, faces the challenge of managing its endowment fund, the St. Thomas More College Investment Trust. The trust, currently valued at $10 million, is primarily invested in fixed income securities, generating a modest return. The college seeks to increase its returns to fund future expansion and enhance its financial stability. However, the current investment strategy is conservative, lacking diversification and active management, putting the college at risk of falling behind in a competitive landscape.
The main protagonists of the case study are:
- Father Michael O'Brien: The President of STMC, concerned about the college's financial future and seeking a more robust investment strategy.
- Sister Mary Agnes: The Chair of the Board of Trustees, responsible for overseeing the investment trust and its performance.
- Mr. John Smith: The college's Business Manager, tasked with managing the day-to-day operations of the trust.
3. Analysis of the Case Study
The case study highlights several key issues:
- Lack of Diversification: STMC's current investment strategy is heavily concentrated in fixed income securities, exposing the trust to significant risk and limiting potential returns.
- Passive Management: The trust lacks an active investment management approach, relying on a conservative, hands-off strategy that fails to capitalize on market opportunities.
- Limited Expertise: The college lacks in-house expertise in finance and investing, hindering its ability to make informed decisions and manage the trust effectively.
- Growth Constraints: The current investment strategy is insufficient to support STMC's long-term growth aspirations, including funding expansion projects and addressing future financial needs.
To analyze the situation further, we can utilize the Financial Analysis Framework, focusing on:
- Financial Statements: Analyzing STMC's financial statements, including the balance sheet, income statement, and statement of cash flows, will provide insights into the college's financial health, liquidity, and profitability.
- Ratio Analysis: Examining key financial ratios, such as profitability ratios, liquidity ratios, and asset management ratios, will reveal the trust's performance and areas for improvement.
- Capital Budgeting: Evaluating potential investment opportunities, using tools like net present value (NPV) and internal rate of return (IRR), will assist in determining the most profitable projects for the trust.
- Risk Assessment: Identifying and quantifying the risks associated with different investment strategies, including market risk, interest rate risk, and credit risk, will help in developing a robust risk management framework.
4. Recommendations
To address the challenges outlined above, we recommend the following:
- Diversify the Investment Portfolio: STMC should diversify its investments across multiple asset classes, including equities, real estate, and alternative investments like private equity and hedge funds. This diversification will reduce risk and potentially increase returns.
- Adopt an Active Investment Management Approach: The college should employ a professional investment manager with expertise in portfolio management and asset allocation. This manager will actively monitor market conditions, identify investment opportunities, and make strategic adjustments to the portfolio.
- Establish a Formal Investment Committee: STMC should create an investment committee composed of individuals with expertise in finance and investing, including representatives from the Board of Trustees, faculty, and alumni. This committee will oversee the trust's operations, provide guidance to the investment manager, and ensure alignment with the college's long-term financial goals.
- Leverage Technology and Analytics: STMC should utilize advanced technology and analytics tools to enhance investment decision-making. This includes using financial modeling software, data visualization platforms, and artificial intelligence (AI) algorithms to identify market trends, analyze risk, and optimize portfolio performance.
5. Basis of Recommendations
Our recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Diversifying the investment portfolio and adopting an active management approach align with STMC's mission of providing a quality education and ensuring its long-term financial sustainability.
- External Customers and Internal Clients: The recommendations prioritize the needs of both external stakeholders, including donors and potential investors, and internal stakeholders, including faculty, staff, and students.
- Competitors: Adopting a more sophisticated investment strategy will allow STMC to compete effectively with other institutions in attracting resources and achieving financial stability.
- Attractiveness ' Quantitative Measures: The recommendations are expected to generate higher returns for the investment trust, as evidenced by historical data and financial modeling. This will enhance the college's financial position and support its future growth.
6. Conclusion
By implementing these recommendations, St. Thomas More College can significantly enhance the performance of its investment trust, achieve its financial goals, and ensure its long-term viability. A diversified portfolio, active management, and a strong investment committee will provide the foundation for sustainable growth and financial stability.
7. Discussion
Alternative strategies include:
- Maintaining the current conservative approach: This option carries the risk of lower returns and potential underperformance compared to a more diversified and active approach.
- Investing solely in equities: While potentially offering higher returns, this strategy exposes the trust to significant market risk and volatility.
Key assumptions include:
- Market conditions: The recommendations assume that the market will continue to grow and provide opportunities for investment.
- Investment manager expertise: The success of the recommendations depends on the competence and experience of the chosen investment manager.
- Commitment from the college: Implementing these recommendations requires a commitment from STMC's leadership and a willingness to invest in the necessary resources.
8. Next Steps
To implement these recommendations, STMC should:
- Form an investment committee: This committee should be established within the next 6 months.
- Recruit a professional investment manager: The college should begin the search process for a qualified investment manager within the next 3 months.
- Develop a comprehensive investment policy: The investment committee should work with the investment manager to create a clear investment policy that outlines the trust's objectives, strategies, and risk tolerance.
- Implement a monitoring and reporting system: The committee should establish a system for regularly monitoring the trust's performance and reporting to the Board of Trustees.
By taking these steps, St. Thomas More College can ensure that its investment trust is managed effectively and contributes to the college's long-term success.
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Case Description
Derrin Raffey, chief financial officer at St. Thomas More College (STM) in Saskatoon, Saskatchewan, Canada, oversaw STM's investment trust. With a value of more than CA$22 million, managing the trust required careful consideration of various factors, including management fees, performance, the appropriateness of the holdings, and relationships with investment managers.
At times, the trust had held investments that were not appropriate, given the college's religious values. However, with the hiring of a new investment manager, switching from pooled fund investment to discretionary investment became an option. As STM did not have a formal process or template for reviewing investment managers, developing these was a priority. Finally, there was the question of what strategy STM should adopt-was it possible for STM to balance its need for growth and returns against other factors such as the college's religious ethos and the wishes of its various stakeholders?
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