A new asset allocation proposed for the University of Texas System’s endowments would increase target weightings to private investments by 5 percentage points and decrease hedge funds by 4 percentage points.
The board of University of Texas Investment Management Co., Austin, which oversees investment of UT’s $17.4 billion Permanent University Fund and $7.2 billion Long-term Fund, approved the new asset allocation for fiscal year 2017, beginning Sept. 1, at a meeting Thursday.
The UT Board of Regents must accept UTIMCO’s investment target recommendations before implementation. Regents are expected to consider the new asset allocation at their meeting in August, said Melanie Thompson, a UT spokeswoman.
UTIMCO’s investment team uses three broad divisions to organize the portfolio: “more correlated and constrained;” “less correlated and constrained;” and “private investments,” according to board meeting materials.
If approved, the broad allocation to more correlated and constrained would be reduced to 39% from 40% of total assets. New individual asset class targets would move developed market equities to 19% from 14%; emerging market equities to 10% from 9.5%; investment-grade fixed income to 7.5% from 6.5%; natural resources to 2.5% from 7.5%; and real estate to zero from 2.5%. The target for credit-related investments would remain at zero.
The target for the less correlated and constrained category, which is invested entirely in hedge funds, would drop 4 percentage points to 25% under the allocation. The target weightings would be: developed markets equity to 17% from 20%; credit-related to 4% from 4.25%; investment-grade fixed income to 2% from 2.25%; and real estate to zero from 0.5%; Target weightings would remain the same for emerging markets hedge fund strategies, 2%, and natural resources, zero.
The overall allocation to private investments would rise to 36% from 31%. In fixed income, there would be no change to the weightings of investment-grade securities, zero, and credit-related, 3.5%. The target weightings for each of the other asset classes would increase: developed markets equity to 12.5% from 11%; natural resources to 9% from 7.5%; real estate to 7% from 5.5%; and emerging markets equity to 4% from 3.5%.
Returns of the current portfolio mix as of May 31 were negative and trailed the endowments’ benchmark in the short term, but topped the custom index over longer periods: nine months, -0.1% (benchmark, 1.5%); one year, -2.9% (-1.6%); three years, 4.9% (4.6%); five years, 4.8% (4.1%); and 10 years, 5.3% (3.7%). Multiyear returns are annualized.