Why investors in universities need to do their homework

With cramming almost complete and supplies of high-energy drinks depleted, exams for final-year university students are well underway. But while some graduates will choose a well trodden career path, for others the future is perhaps less certain.

Investors looking to put capital into the university sector are facing some uncertainties of their own. The long-term outlook for the sector is promising, in our view. Data from UCAS show that, despite short-term uncertainties, higher education continues to appeal. Total admissions in the UK grew by 5.4% year on year in 2020. Among non-EU students, the increase was more pronounced, growing by 16.9% year on year.^[1]

With the number of 18 year olds in the UK set to increase from 2021, and an expectation of wider participation in higher education from emerging economies, we believe this provides a favourable fundamental backdrop for continued growth in the sector.

However, we don’t think the benefits of this backdrop will be shared equally across the sector. Even prior to the onset of COVID-19, shifting sentiment from students on the perceived value for money of some courses, higher-education reform led by the UK government, and uncertainty for EU students over future funding in the aftermath of Brexit were just some of the prevailing headwinds.

University rankings

But just how well can investors differentiate between institutions? Not that easily. We believe that while existing classifications – such as the three-tier tariff classification or the self-identified Russell Group classification – are useful, they don’t fully highlight the differences between universities, essential traits for any long-term investor.

As a way of addressing this, we have constructed a new set of classifications, ranging from the elite like Oxbridge to those that ‘could do better’. To construct these groupings, we drew on indicators such as an overview of the attractiveness of the institutions to students, their global appeal, the qualifications of new entrants to the university, the overall quality of the research and teaching provided, the course mix, and the financial soundness of the institution. While not exhaustive, we believe these characteristics capture many of the important structural features which investors need to incorporate in their decision making.

Our six-cluster classification is thus broken down as follows:

• Global elite institutions (e.g. Universities of Oxford & Cambridge) – characterised by their high degree of income generated through research, strong student demand, as well as attracting a high proportion of international students.

• Research-led global destinations (University of Manchester, LSE) – like the global elite category, but a distinct polarisation between the profitability and research quality within the overall group.

• Mainstream winners (Newcastle University, Cardiff University) – typically lower entry requirements for students, with a comprehensive mix of subjects taught.

• Specialists (University of the Creative Arts and the Royal Agricultural College) – their niche subject tilt means that they have a smaller footprint regarding overall student share, but they should benefit from sustained demand and financial surpluses.

• Steady eddies (University of Huddersfield, Liverpool Hope University) – institutions that, while not standout performers in regard to teaching and research quality, generate consistent financial surpluses, supporting long-term viability.

• Trailing institutions – typically undistinguished and considered mid- or lower-ranking institutions, which are more likely to be a backup for some students applying there.

This type of classification reinforces our belief that a select number of institutions are best placed to benefit disproportionately from the student growth in higher education. The analysis highlights that the top four groups have seen much stronger relative growth in students than those in the bottom two.

This in turn should ultimately provide a foundation for growth and stability in the income generated through tuition and accommodation fees generated by those institutions.

For investors, doing some extra homework and selecting the ‘right’ university would seem to be a task well worth undertaking. In this regard, the classification outlined below can, we believe, provide an additional strand to the due-diligence process.

Source: LGIM Real Assets, June 2021

Source: LGIM Real Assets, June 2021

[1] UCAS End of Cycle Report 2020.