Investment firm seeks regents' OK to shift asset mix

Company plans to invest more in hedge funds, derivatives; regents are skeptical

By Ralph K.M. Haurwitz
AMERICAN-STATESMAN STAFF
Friday, November 1, 2002

DALLAS -- The nonprofit company that manages billions of dollars worth of stocks, bonds, real estate and other assets for higher education in Texas is once again drawing sharp questioning from its bosses, the University of Texas System regents.

The regents are challenging a proposal by the University of Texas Investment Management Co. to shift more endowment money into hedge funds and derivatives -- two asset categories that require highly sophisticated investment skills.

The regents' finance committee declined at a testy meeting Oct. 10 to approve the company's proposal and even refused to sign off on a routine, one-page report on investment performance, complaining that it had not been submitted in advance.

The regents instructed the company's president, Bob Boldt, to appear at their Nov. 12 meeting with a more detailed justification of the proposed changes. The regents have the final say on investment policy.

The dispute comes several weeks after a flap over public records. Under pressure from the regents, the management company's board agreed in September to release performance figures for individual investments that are not publicly traded. The board had quietly stopped disclosing such information in October 2001.

The company oversees $13.3 billion for the UT System, the Texas A&M University System and other state institutions. Of that amount, $10.2 billion is in the Permanent University Fund and other endowment accounts. The balance is shorter-term operating money.

The management company's board, whose nine members include three UT regents, met Thursday in Dallas and adopted a policy that spells out the broad outlines of its plan to shift more money into derivatives, subject to certain limitations and close scrutiny by the board. Derivatives are contracts, such as certain types of stock options, whose value is based on the performance of an underlying stock, bond, commodity or other investment.

The management company's board previously approved placing 20 percent of endowment assets in hedge funds, double the current target of 10 percent. Hedge funds are private investment partnerships whose managers may use a variety of tools in an effort to profit in any market environment, including one with declining prices. For example, they may bet that certain stocks will fall in value.

Boldt, a former hedge fund manager who was hired by the company in part on the strength of his skill in that arena, said the goal of upping the stake in hedge funds and derivatives is to boost returns 2 percent to 3 percent above what they would be if money simply were placed in index funds that mirror the performance of the broad stock market. Done properly, investments in hedge funds and derivatives often carry less risk than conventional investments, he said.

The regents have allotted 1 1/2 hours on Nov. 12 for Boldt to make his case. He said Thursday that he is confident he will win their approval.

UT System Chancellor Mark Yudof, who serves on the management company's board, said he was comforted by the insistence of other board members on Thursday that investments in hedge funds and derivatives be monitored closely by the staff and the board.

"I just want to be very cautious and prudent about it," Yudof said.

There is no doubt that the controversy over public records has prompted the regents to step up scrutiny of the management company, which the regents themselves established in 1996 to handle the nitty-gritty of investments.

"I wouldn't be necessarily willing to say that we'd agree with whatever the UTIMCO board decided the policy was," Charles Miller, chairman of the regents, said at the Oct. 10 meeting. "In other words, I think we'd look at the policy and decide. So there's a kind of order here, not a blank check."

A case in point was the regents' response to the management company's report outlining investment performance for the quarter that ended Aug. 31. After Regent Cyndi Taylor Krier said she couldn't approve a document that she had not been given time to review, the committee voted merely to "accept" the report.

The regents also have balked at the company's proposal to lower the expected annual return for endowment funds. The current expectation is 9.35 percent, and Boldt says 7.4 percent would be more realistic in light of current economic conditions. The projected return weighs heavily in calculations of how much money is available for construction bonds, professor salaries and other programs.

rhaurwitz@statesman.com; 445-3604