UT regents order review of UTIMCO

Regents criticize fees, bonuses at investment company

By Robert Elder Jr.
Saturday, December 20, 2003

University of Texas System regents are targeting the management and structure of the system's outside investment company, ordering a second review of its operations.

Some regents are raising concerns about how much the University of Texas Investment Management Co. spends on compensation and outside fees. Chairman Charles Miller said Friday that the regents' oversight of the investment company, known as UTIMCO, is inadequate.

UTIMCO has had stellar returns on its investments recently, but the regents' move signals displeasure with Bob Boldt, the company's president and chief executive officer since April 2002. UTIMCO manages $15.2 billion in endowment funds for the UT and A&M systems.

At the urging of Miller and Regent James Huffines of Austin, a commercial banker, the Board of Regents voted Friday to hire the Houston law firm Baker Botts LLP to analyze operations at UTIMCO. The firm will examine investment services, consulting and legal fees and the company's reporting procedures.

In February, Baker Botts delivered a 116-page report on the investment company to the regents. The Board of Regents spent $203,350 on that review, which was generally an analysis of UTIMCO's fiduciary duties and legal relationships with the UT System and other entities. The report didn't list consulting, legal or compensation fees, although those are likely to be a focus of the next review.

Still, the report identified potential conflicts of interest. For example, the company's principal consultant, Cambridge Associates, sells investing advice to UTIMCO and also sets its performance benchmarks.

On Friday, the regents directed UTIMCO's management not to approve any changes in the company's pay or bonus structure for this fiscal year, which started Sept. 1. UTIMCO has its own board of directors.

Miller led the move to review UTIMCO's operations. The retired Houston investment manager told regents that he has serious concerns about the amount of legal, investment and administrative fees the company pays.

"Those are our dollars, the Board of Regents'," he said. "I'm not comfortable with the costs and expenses in the past."

Miller said the UT System is in the midst of management reviews of many of its components. Further review of UTIMCO is particularly needed in light of the public's demand for better corporate governance, he said.

Boldt said he doesn't agree with Miller's contention about fees.

"We watch expenses very well," he said. "The UTIMCO board is right on top of our expenses."

Regent Woody Hunt said the heightened review of UTIMCO doesn't reflect on the company's performance.

"We're in the best shape today in UTIMCO than we've ever been," he said.

Over the past 12 months, Hunt said, UTIMCO's performance bettered that of all but five of the 34 large endowment funds tracked by Cambridge Associates.

Hunt said UTIMCO's recent results have greatly improved the traditionally poor performance of the largest component UTIMCO manages, the $7.2 billion Permanent University Fund. Proceeds from the fund go to the UT and Texas A&M systems. The second-largest fund is the $2.8 billion Long Term Fund, which is structured as a mutual fund. Cash distributions are paid directly to UT System institutions.

For the year that ended Nov. 30, UTIMCO said, the Permanent School Fund returned 19 percent and the Long Term Fund posted a 20 percent return. "We've had tremendous improvement" for the system, Boldt said.

Even so, Hunt said he supported the review of UTIMCO, including a freeze on any change in the company's compensation plans.

Boldt made $400,000 in salary and a bonus of $290,000 in the most recent fiscal year. He deferred half the bonus.

The compensation issue came up just three hours after the regents met. Late Friday, UTIMCO's compensation committee approved a compensation plan, including bonus criteria. But, mindful of the regents' meeting earlier, the committee decided not to make the plan retroactive to the Sept. 1 start of the fiscal year. UTIMCO's board will handle that question.

In an interview after the regents' meeting, Miller criticized UTIMCO's staff for resisting the disclosure of performance data for its private equity investments. UTIMCO began releasing that data last year, a decision that some venture capital firms complained would not reflect the nature of long-term investments. The Texas attorney general ruled that the the information is public.

Miller said UTIMCO continues to try to obscure venture capital returns. Last month, Dow Jones reported that UTIMCO had changed how it reports performance data to better reflect the long-term nature of such holdings. Calculations of the portfolios' annualized performances at one-, three-, five- and 10-year intervals no longer will be done, the company said.

"I don't think they should have done that," Miller said. "We should have had a discussion about it."

Boldt declined to discuss the disclosure issue.

relder@statesman.com; 445-3671