Rift emerging over UTIMCO pay

Board approves increase, despite criticism from UT regents

By Robert Elder Jr.
Wednesday, January 14, 2004

Read Regent Chairman Charles Miller's Letter to the Board of Regents(pdf)

The issue of pay for the University of Texas System's outside investment company has emerged as a potentially deep rift between the UT regents and the managers of the system's $14.8 billion endowment.

The board of directors for the University of Texas Investment Management Co. voted 6-2 Tuesday to approve a new compensation plan for its managers, despite a warning to hold off until UT regents finish reviewing the operations of the company, known as UTIMCO.

Two members of UTIMCO's board -- Mark Yudof, chancellor of the UT System, and Regent James Huffines of Austin -- voted against approving the compensation plan, which remains subject to action by the Board of Regents at its meeting Feb. 3 and Feb. 4 in Brownsville.

Yudof said the UTIMCO board didn't have enough information on how its compensation plan stacked up against those of other large, public entities, not just private endowments.

"The nature of the institution matters," said Yudof, noting that UTIMCO and the UT System must answer to lawmakers and open its books to the public.

At issue is whether UTIMCO managers, who oversee the nation's second-largest educational endowment, should be paid more like state employees or on par with managers of other huge funds. Most comparable funds are private, such as that of Harvard University, the nation's largest educational endowment. Complicating the debate is UTIMCO's unusual status as a private company overseen by its own board and UT System regents.

The amount of compensation paid to UTIMCO's 35 employees is small compared with the tens of millions of dollars in fees it pays its consultants and outside investment managers. But Woody Hunt, chairman of the UTIMCO board, warned Tuesday that getting the right compensation plan in place "will ultimately define the UTIMCO of the future."

Hunt said UTIMCO should compete for talent as hard as the UT System does for students, faculty and research dollars.

"We seem to have a culture that says, go out and pay a nationally competitive salary for athletic coaches," Hunt said. "But when it comes to investment managers, which I agree is more important . . . we seem to have given up. There's something out of whack here."

Six UTIMCO executives, including President and Chief Executive Bob Boldt, make more than $200,000 a year in base salary. Bonuses for the current fiscal year haven't been set, but last year, Boldt and his top deputy received bonuses equal to 75 percent of their base pay. A handful of other managers reaped more than half their base pay as a bonus.

The vote on the compensation package came one day after Charles Miller, the chairman of the Board of Regents, wrote a letter to regents criticizing the average investment performance of UTIMCO's portfolio. Miller told regents that salaries for the current fiscal year and bonuses for last year are "in excess of what should be required to operate a strong investment organization."

Hunt said Tuesday that he "strongly disagreed" with Miller on that issue.

In a later interview, Miller said Boldt and his staff don't have a sufficient track record to justify their large pay increases and bonuses. He also cautioned against the idea that big compensation packages will automatically translate into large returns.

At Miller's urging, UT regents last month ordered a second review of UTIMCO's operations by Houston law firm Baker Botts LLP. Miller said regents need to exert more oversight of UTIMCO's operations.

Miller said he'd prefer the compensation plan go into effect Sept. 1, the beginning of the fiscal year, rather than nearly halfway through the current year.

Other UTIMCO directors rejected Miller's criticism.

"If you underpay, you underperform" in the portfolio, said Luther King, a Fort Worth money manager.

UTIMCO directors said Boldt had rebuilt the investment staff almost from scratch after an exodus of managers from 1999 to 2001.

Looked at broadly, UTIMCO's two main portfolios had an unremarkable year. The $7.2 billion Permanent University Fund, which contributes to the support of 18 institutions and six agencies in the UT and Texas A&M systems, returned 12 percent for the fiscal year ended Aug. 31. The target, set by UTIMCO's directors, was 12.8 percent.

The $3.6 billion General Endowment Fund, which operates as an internal mutual fund and pays quarterly distributions to UT System components, returned 12.81 percent for the year -- only slightly above the target of 12.77 percent.

Hunt said overall returns were dragged down by poor paper returns from venture capital investments, most of which were made by Boldt's predecessors. He said Boldt shouldn't be held responsible for those investments.

The compensation plan that goes to UT regents is made up of base salary, a year-end performance bonus and a long-term bonus based on performance and paid over three years.

For any employee to earn a bonus, UTIMCO's performance must at least beat the median return of other funds.

UTIMCO's performance has improved under Boldt, who has been on board a little less than two years.

In the year ended Sept. 30, its return ranked just below the top one-third of funds with $1 billion or more in assets. Over the past 10 years, the endowment has ranked near the bottom of similar funds.

relder@statesman.com; 445-3671