UTIMCO debate has big stakes for UT

Regents, board members divided over how to raise performance of fund that sends millions each year to UT, A&M

By Robert Elder Jr.
Sunday, February 1, 2004

Read the UTIMCO Letter to the Board of Regents(pdf)

Bob Boldt, the coolly self-assured CEO of the University of Texas Investment Management Co., is not a gather-round-the-campfire type. But he likes to tell a story he calls "A Tale of Two Endowments."

One is Harvard University's, which in 1992 was slightly smaller than the No. 1 UT System's. Harvard revamped its investment arm, allowing new CEO Jack Meyer to hire top managers, pay them lavish bonuses and invest in then-exotic financial vehicles.

The UT System stood pat. University employees managed the endowment conservatively.

By last year, Harvard's endowment was the biggest in the country at $18.9 billion, up 271 percent from 1992. Texas' Permanent University Fund totaled $9.7 billion, up 83 percent.

The gap matters. Each year, the Texas endowment distributes hundreds of millions of dollars to the UT and Texas A&M systems, money that helps pay for salaries and programs at 18 campuses. The payout is based on the value of the endowment; the more it grows, the more money for the universities.

Under Boldt, UTIMCO's returns have picked up recently. But less than two years into his tenure, he faces sharpening attacks from UT Board of Regents Chairman Charles Miller.

Miller has peppered his fellow regents with criticism of Boldt's investment strategy, the amount he wants to pay his staff, even the money UTIMCO spends on legal and consulting fees.

As a result, a sharp split has developed between the regents, not all of whom are sold on Boldt, and UTIMCO directors, most of whom praise Boldt as a savvy, experienced investor who's hired a good team.

Miller, a retired Houston money manager, says he's not convinced that Boldt can improve the endowment's returns. In any event, Miller says, Boldt needs a longer record of success before he's willing to sign off on a more generous compensation plan, as UTIMCO proposes.

It's not certain that Boldt will get the chance to compile a long-term record.

Tuesday and Wednesday, regents will debate a linchpin of Boldt's strategy: a compensation plan that could pay UTIMCO money managers in the same league as other top-tier endowments. It's been stalled for months because of Miller's concern that regents weren't in on the process from the start. A final decision will probably come March 11 in Austin.

Pay is the immediate issue for the regents, but not the most important one, says UTIMCO board member Luther King, president of Luther King Capital Management in Fort Worth. Rather, it's whether UTIMCO will be able to make the hiring and strategy decisions needed to generate higher returns.

"The longer term issue is the process and governance, to allow UTIMCO to function at a level where it's competitive in investing," King says.

Pay at UTIMCO lags that of other big endowments. The pending plan would bring UTIMCO's pay in line with the top quarter of endowments with more than $5 billion in assets, a group of just 15 funds, most private. The UT System itself attempts to pay in the top quarter for jobs at similarly sized institutions.

Failure to adopt the plan, Boldt says, would hurt his ability to recruit and even retain managers he's hired. In 2000, before his arrival, UTIMCO's private-equity team quit en masse over a pay dispute.

Miller says he isn't convinced that UTIMCO officials should be paid like their peers, most of whom work for private endowments, a concern shared by UT Chancellor Mark Yudof. (Yudof declined to be interviewed for this story.) Further, Miller says the investment company has never had proper oversight from the regents, who are "the ultimate owners" of the $15 billion the company manages.

The amount includes the Permanent University Fund, three other major endowment funds and operating funds.

"There isn't any evidence I know of -- and this is a hard thing for a capitalist to say -- that higher pay gets better performance," Miller says.

Craig Hester, a UTIMCO board member who runs an Austin money management firm, disagrees: "I strongly believe there is a correlation between good investment performance and paying your team at a competitive level."

"In the final analysis," Hester adds, "you're not going to know whether we were right until several years down the road.."

Public-private mix


In 1995, UT officials, led by then-regents Chairman Thomas Hicks of Dallas, lobbied to spin off the university's investment operations as a separate, not-for-profit company, in part to allow the fund to pay enough to attract top money managers. The result was UTIMCO, created in 1996.

Although the endowment is a private company, it manages public funds. The mix has been combustible.

Under Hicks, the company operated in private. Neither its meetings nor its records were public, which fueled suspicion when newspaper reports detailed the hundreds of millions of dollars Hicks and the board had steered to investments and funds with ties to prominent Republicans.

It isn't clear how those controversies affected UTIMCO's performance. But its record is lackluster: In the 10 years that ended Nov. 30, the Permanent University Fund had an annual return of 9 percent. That's well below the 10.3 percent of the Wilshire 5,000 Index, which tracks the entire market in U.S. stocks, and an endowment benchmark of 10.4 percent.

Most UTIMCO directors say Boldt has turned in a solid performance while building a team that is poised for greater things.

In the year that ended Nov. 30, the university fund had a return of 19.3 percent, sixth among the 39 U.S. university endowments worth more than $1 billion. The fund's return also outpaced the fund's internal benchmark by 1.53 percentage points. That means $537 million more flowed into the fund than if the return had simply matched its target.

"That is what this debate should be all about," says Hester. "I'd be the first to admit there's the tailwind of a bull market behind these numbers. But there have been good, tactical decisions made by staff."

A public university will never pay what Harvard does. Its six highest-paid endowment managers earned a combined $107.5 million in fiscal 2003 after producing some of the best investment returns in the nation.

But how should UTIMCO managers be paid: like state employees or on par with managers of the nation's largest endowments, most of which are private?

The differences are stark. Boldt made $698,800 last year in salary and bonus. Jim Hille, the chief investment officer of the $78 billion Teacher Retirement System of Texas, will make $276,755 this year, all in salary.

In the bigger scheme of things, UTIMCO and the regents are arguing over small beer.

UTIMCO would pay a maximum $3.3 million in bonuses this year under the proposed plan. That's 2.5 percent of how much more they would generate for the fund, above its target.

The total is also less than the $3.6 million that head football coach Mack Brown will earn this year: $2 million in salary and a one-time payment of $1.6 million on his birthday, Aug. 27.

"You get what you pay for in anything," said Boldt supporter Scott Caven, a UT regent and a managing director of Atlantic Trust Co. in Houston. "If there's any place we need to make an investment, it's in higher education."

A question of style


Boldt's aggressive style may account for some part of his critics' displeasure. He rarely schmoozes at regents' meetings and he can come off as aloof. Although he's a San Antonio native with two degrees from UT, his sleekly tailored suits seem more suited to the financial world on either coasts than a university setting.

But his investment philosophy was no secret when UT hired him. Twenty years ago, Boldt wrote an article for a financial journal arguing that, in order to beat the stock market's returns, money managers had to seek out the best alternatives, such as hedge funds, which are loosely regulated investment pools, venture capital deals, commodities and other vehicles.

He put his views into practice at the $154 billion California Public Employees Retirement Fund, or Calpers, where he was a senior investment officer.

According to Institutional Investor magazine, Boldt created a hybrid program that combined hedge funds with private investments. In 1999, Calpers said it would invest $1 billion in hedge funds over time.

Boldt left Calpers eight months later, having turned down an offer to become chief investment officer. He later joined Pivotal Asset Management of San Francisco, left after the dot-com bust, then signed on with UTIMCO.

Boldt has steered UTIMCO into more hedge funds and other investments that can't be immediately cashed out, such as stocks and bonds. Recently, hedge fund returns have boosted UTIMCO's performance.

Though Boldt often uses the Harvard analogy, he says Yale may be the better example.

In 1985, David Swensen took over Yale's underperforming endowment of $1 billion. Over the next 15 years, he posted annualized returns of 17.4 percent, and he did it by investing less money in U.S. stocks during a prolific bull market.

Boldt placed copies of Swensen's 1999 book, "Pioneering Portfolio Management," in front of UTIMCO directors when they met last month, a not-so-subtle advertisement for the direction Boldt wants to travel.

Betting on his approach, Boldt says, does require "a little leap of faith, but the evidence is on my side."

relder@statesman.com; 445-3671