Harvard Case - The University of Notre Dame Endowment
"The University of Notre Dame Endowment" Harvard business case study is written by Andre F. Perold, Paul Buser. It deals with the challenges in the field of Finance. The case study is 20 page(s) long and it was first published on : Oct 15, 2009
At Fern Fort University, we recommend that the University of Notre Dame Endowment (UND) adopt a more diversified investment strategy, focusing on alternative asset classes like private equity and real estate, while maintaining a strong commitment to responsible investing. This will involve a shift in the endowment's financial strategy, emphasizing long-term growth and risk management through a balanced approach to asset allocation.
2. Background
The University of Notre Dame Endowment faces a challenging environment. The endowment's financial performance has been lagging behind its peers, and the need to meet the university's growing financial needs is becoming increasingly pressing. The endowment's current investment strategy, heavily focused on fixed income securities, has proven insufficient in generating the desired returns.
The case study highlights the key protagonists:
- John Affleck-Graves: The University's Executive Vice President and Chief Financial Officer, responsible for the endowment's performance and strategic direction.
- The Investment Committee: An advisory body tasked with overseeing the endowment's investment strategy and making recommendations to the Board of Trustees.
- The Board of Trustees: The ultimate decision-making body responsible for the endowment's long-term financial health and sustainability.
3. Analysis of the Case Study
The case study can be analyzed through the lens of portfolio management and financial analysis. The endowment's current strategy exhibits a significant concentration risk, as the majority of its assets are invested in fixed income securities. This strategy, while considered safe, has not delivered the desired returns. The endowment needs to diversify its portfolio to mitigate risk and enhance returns.
Financial analysis reveals several key aspects:
- Financial statements: The endowment's financial statements highlight the need for improved returns to meet the university's growing financial needs.
- Ratio analysis: Analyzing profitability, liquidity, and asset management ratios reveals the endowment's current strategy is not maximizing returns.
- Capital budgeting: The endowment needs to carefully evaluate potential investments using NPV and ROI calculations to ensure a positive impact on overall returns.
4. Recommendations
To address the challenges and achieve the desired long-term growth, the following recommendations are proposed:
- Diversify the portfolio: Increase the allocation to alternative asset classes like private equity, real estate, and hedge funds. These investments offer the potential for higher returns, though they also come with increased risk.
- Adopt a responsible investing approach: Integrate environmental, social, and governance (ESG) factors into the investment decision-making process. This aligns with the university's values and can attract investors who share similar beliefs.
- Enhance investment management capabilities: Strengthen the endowment's internal investment team or consider partnering with external investment managers with expertise in alternative asset classes.
- Implement a robust risk management framework: Develop a comprehensive risk management strategy that includes hedging and scenario planning to mitigate potential losses.
- Improve communication and transparency: Enhance communication with stakeholders, including the university community, alumni, and donors, to ensure transparency and build trust in the endowment's investment strategy.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Diversifying the portfolio aligns with the university's long-term financial goals and supports its mission of providing a world-class education.
- External customers and internal clients: The recommendations consider the needs of the university's various stakeholders, including students, faculty, and staff.
- Competitors: The endowment needs to benchmark its performance against other university endowments to ensure it remains competitive in attracting and retaining talent.
- Attractiveness ' quantitative measures: The recommendations are supported by financial modeling and valuation methods that demonstrate the potential for increased returns through diversification and alternative investments.
6. Conclusion
By adopting a more diversified investment strategy, focusing on responsible investing, and enhancing its investment management capabilities, the University of Notre Dame Endowment can achieve its long-term financial goals and ensure its continued success in supporting the university's mission.
7. Discussion
Other alternatives not selected include:
- Maintaining the current strategy: This option carries the risk of underperforming compared to peers and failing to meet the university's growing financial needs.
- Investing solely in high-risk, high-return assets: This strategy could lead to significant losses if the market turns unfavorable.
Key assumptions underlying the recommendations include:
- Market conditions: The recommendations assume a long-term positive outlook for the global economy and financial markets.
- Investment expertise: The endowment has the necessary expertise or access to external managers to effectively manage alternative asset classes.
- Regulatory environment: The recommendations assume a stable regulatory environment that does not significantly impact the endowment's investment strategy.
8. Next Steps
The following steps should be taken to implement the recommendations:
- Develop a detailed investment plan: This plan should outline the specific asset allocation targets, investment strategies, and risk management measures.
- Engage with external investment managers: The endowment should conduct a thorough due diligence process to identify and select reputable investment managers with expertise in alternative asset classes.
- Implement a robust monitoring and reporting system: The endowment should regularly monitor the performance of its investments and provide transparent reporting to stakeholders.
By taking these steps, the University of Notre Dame Endowment can position itself for long-term success and continue to support the university's mission of providing a world-class education.
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Case Description
The Endowment Model of Investing, which was based on creating high risk-adjusted performance through diversification, a long time-horizon, top-notch outside managers, and illiquid investments, had served Notre Dame and other large universities well over the past several decades. Scott Malpass, Notre Dame's Chief Investment Officer, was confident that this was a successful way to invest if implemented effectively, but he also saw the top university endowments experience 25% to 35% declines in portfolio value during the second half of 2008 that eviscerated the investment gains from the past several years. Notre Dame had weathered the crisis relatively well, but there were several key questions Malpass had to address. Should Notre Dame continue to make illiquid investments in the context of rising unfunded commitments relative to liquid funds? Was compensation adequate for the illiquidity of these types of investments? In relation to manager selection, how could the Notre Dame investment team continue to find the best managers to create alpha? To what extent would the performance of managers during the crisis be predictive of future performance in other portions of the economic cycle? How would the long-established industry terms of contract between clients and managers change going forward? Was there an opportunity for clients to negotiate better terms? These issues all needed to be addressed in the context of protecting the University's operating budget and supporting the mission of the institution.
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