UTIMCO leader Harris employing similar playbook as he did as Texas Teachers CIO

T. Britton Harris IV is relying on many of the tenets he honed as chief investment officer of the $151.4 billion Teacher Retirement System of Texas in overhauling the investment management of $43 billion of endowment and operating funds of The University of Texas/Texas A&M Investment Management Co.

In the nine months since he made the crosstown move in Austin to serve as UTIMCO's president, CEO and CIO, Mr. Harris conducted a comprehensive review of the operations of UTIMCO.

"We went through a very significant action plan process across the whole organization to lay a foundation that can last for years," Mr. Harris told UTIMCO's board of directors during a Feb. 28 meeting, according to an audio recording.

"The two most important words for (2018) are total alignment," Mr. Harris said, stressing the goal of the changes he is making is to align UTIMCO internally, with its board of directors, with external partners including money managers, and with its investment clients — the University of Texas and Texas A&M University.

The new investment priorities, detailed in UTIMCO's Feb. 28 board book, closely echo those of Austin-based Texas Teachers, including:

• Focus on private investments, particularly to increase co-investments.


• Create large, multiasset strategic investment partnerships with money managers in public and private market strategies, particularly private equity, real estate and natural resources, with a significant co-investment component.


• Add a stable value hedge fund component to the existing portfolio of directional hedge funds.


• Lower and better-align money manager fees.

Mr. Harris' choice of two former Texas Teachers' officials as his chief lieutenants in rebuilding UTIMCO reinforces the links to the TRS way of investment.

Richard Hall, UTIMCO's deputy CIO, was managing director and head of private equity and principal investments at the teachers' system. Ken Standley, UTIMCO's chief of staff, was deputy chief of staff at the teachers' fund.

Specifics about UTIMCO's restructuring plans were not available, said Karen Adler, a University of Texas spokeswoman. Mr. Harris wasn't available for an interview and the company's investment department could not respond to questions from Pensions & Investments by press time.

However, perusal of meeting reports and audio from UTIMCO board meetings provide a detailed look at the plans of UTIMCO's senior management team.

During the February board meeting, for example, Mr. Harris said a top goal of the investment staff was to transform UTIMCO into "the preferred destination for attractive large investments. ... We want to be a preferred client, the client the manager brings the best deals to," according to the audio recording.

He made a very similar pitch to Texas Teachers' trustees three years earlier.

Strategic partnerships with money managers, of the type TRS pioneered beginning in 2008, will help UTIMCO become that preferred investor because the mandate size for investment in public and private markets is large and attractive to managers, Mr. Harris told UTIMCO directors during the Feb. 28 meeting.

"I've done this before," he said during the meeting, pointing out to directors that the strategic partnerships at TRS typically produced "outsized" absolute and risk-adjusted returns, and had the added benefit of bringing additional market information research to investment staff.

Texas Teachers' four public markets strategic partners managed a total of $8.2 billion and topped the fund's benchmark in the three months, one year and three years ended Dec. 31, a TRS investment report showed.

UTIMCO this year will identify two or three firms running private investment strategies such as private equity and natural resources as potential strategic partners, the February meeting report showed.

To diversify its $10 billion hedge fund holdings, UTIMCO adopted Texas Teachers' portfolio model, which includes a directional hedge fund allocation that is expected to outperform equities in down markets and underperform during strong periods as well as a stable value weighting that is anticipated to produce positive returns in down markets, a hedge fund review from the May 18 board of directors meeting showed.

As of March 31, UTIMCO's $7.7 billion directional portfolio with investments in long/short equity, multiasset, event-driven, credit and macro strategies accounted for 76% of total hedge fund assets. The balance was in equity market-neutral, macro, multiasset and credit stable value hedge funds.

During the May board meeting, UTIMCO directors learned the company's efforts to renegotiate hedge fund fees on a 1-or-30 model were successful to the extent that 16 — or about half — of its existing hedge fund managers agreed to use the model, according to Bloomberg. The model pays managers the higher of a 1% management fee or a 30% performance fee of gross alpha production,

Ryan Ruebsahm, UTIMCO's managing director of hedge funds and credit strategies, said at the May meeting the managers that agreed to the fee model are of "all shapes and sizes and strategies."

Texas Teachers was the first large U.S. pension fund to adopt the 1-or-30 model in 2016.

Mr. Harris told UTIMCO directors during the February board meeting that staff continued to review underperforming public equity managers with fees of more than 50 basis points, with the aim of compensating managers for actual performance rather than promised performance.

Among other changes with a less direct trajectory to practices Messrs. Harris, Hall and Standley brought with them from Texas Teachers, UTIMCO will complete a strategic asset allocation review in the second quarter, the May 18 board report showed.

The target policy portfolio for the fiscal year ending Aug. 31 for the $21.3 billion Permanent University Fund, the larger of the two educational endowments, was 44.5% developed country equity, 17% emerging markets equity, 14.5% natural resources, 9.5% investment-grade fixed income, 7.5% credit-related fixed income and 7% real estate.

UTIMCO's teams also are developing preferred manager lists to form a sort of bullpen, Mr. Harris said in the February meeting.

"Rather than try to find managers one at a time, the teams are looking for the 30 top managers in the world for each strategy. It's kind of like baseball," he said. "You'd rather be able to take them off the bench when you need them, rather than saying, 'We need a second baseman' and then having to find one."

Employee retention also is a priority for UTIMCO, Mr. Harris said during February's board meeting, given that there had been 37 departures from the company over the previous three years.

One of UTIMCO's goals is to be "the preferred investment employer in the Southwest," with a focus on long-term compensation, maturing of investment teams that have a lot of new members and success, showed February board materials.

Further, Mr. Harris said he wants "people to be friends, to do things together ... and to get out of their self-contained offices."

To that end, UTIMCO is adding pingpong and pool tables to its offices to bring people together. It's important enough to Mr. Harris that he said, "I'll pay for them myself if I have to."