By Charles Skorina
Endowment returns took a beating last year and the turnover in chief investment officers tells the tale.
Among the big names to make an exit in 2016 was Bruce Zimmerman, longtime CEO of The University of Texas Investment Management Company (UTIMCO).
We wrote about endowment turnover in our last newsletter.
Texas is the home of big money, bigger egos, and bare-knuckled politics and the last few years have been uneasy ones for the UT system and, collaterally, for UTIMCO.
Here's what happened:
Prologue: An Admiral comes aboard
Five years ago I, and many others who don't much follow naval affairs, became aware of Admiral William H. McRaven.
The short version of his bio is: He's the guy who got Bin Laden. To be sure, it was a SEAL operator who put a bullet through OBL's black heart in 2011; but it was Adm. McRaven, as commander of JSOC (Joint Special Operations Command), who planned and executed the op.
In May, 2014 he made another big impression. He showed up to give the commencement address at the University of Texas in Austin, his alma mater, refulgent in his dress whites instead of a drab academic gown. And, his talk, as the kids say, went viral, with over 4 million views on YouTube. It was widely remarked upon all over the country.
The admiral's "If you want to change the world, start off by making your bed" speech is worth a watch.
Apparently Texans took particular notice.
Dr. Francisco G. Cigarroa, Chancellor of the UT System had announced just four months earlier that he was ready to step down and would leave at year-end.
Dr. Cigarroa had been touched, but mostly untainted by a rancorous, multi-year admissions scandal and a governance struggle at the flagship campus in Austin, which caused the Regents to force out campus president Bill Powers.
Following Adm. McRaven's star turn it was clear that the Regents had found their new Chancellor. He was named sole finalist for the job in July, 2014, two months after his speech. He got the formal nod in August, and took office five months later in January, 2015.
It's a pretty nice job. As a federal employee, Adm. McRaven made about $200K. As UT Chancellor, McRaven makes $1.2 million take-home. He negotiated a 60 percent increase over the $750K his predecessor made. That doesn't include some $400K in deferred comp he will collect in subsequent years.
What's important for our story, however, is that the UT chancellor also automatically takes a seat on the governing board of UTIMCO. In fact, he becomes UTIMCO's Vice Chairman for Policy. So, starting in 2015, Mr. Mc Raven was also one of the nine men who govern UTIMCO and the multi-billion endowment it manages for UT and, in part, for Texas A&M University.
A sudden departure
Another big Texas job turned over in October, 2016. Bruce Zimmerman, CEO and chief investment officer at University of Texas Investment Management Company (UTIMCO), departed after 9 years in office.
Mr. Zimmerman's departure was uncommonly sudden. A press release on October 10 announced a resignation effective that same day, which is not how things are usually done.
Per his separation agreement, he got a total of about $1.3 million in severance payments, and that was that.
Writing in UT's hometown paper, the Austin Statesman, reporter Ralph Haurwitz asked Mr. Zimmerman the delicate but unavoidable question: whether he decided to resign or was nudged?
Mr. Zimmerman responded: "I would say it's mutual. I've been thinking about it for a year or two. I really am ready to do something different. We have a relatively new board. I think they have an interest in kind of putting on their print. So it works out for everybody. I'm very happy."
A conservative consensus?
In our review of the big Public Ivy endowments two years ago, Mr. Zimmerman got a very honorable mention.
We noted that the UT System is by far the largest public university, with twice the assets of its next-biggest rival, the University of California System. But their 5-year returns both then and now were only in the middle of the pack for the publics.
But we noticed something interesting when we computed Sharpe ratios over five years: UT/UTIMCO moved up to first place. They clearly had the best risk-adjusted returns in this pack of 15 big publics.
That risk/reward tradeoff appears to have been a deliberate policy, one which had been duly approved by the board and constituents.
A 2013 report contained this language:
"Over the past few years, the Endowment's investment returns have lagged other large endowments primarily due to the Endowment's lower risk profile...While it is the case that risk has been rewarded over the past few years, there is agreement [among staff, Board, and Regents] that the necessity to protect principal supersedes the desire for higher investment returns."
And, Mr. Zimmerman told a reporter: "...It is not surprising that UT's returns have been a bit lower than the other endowments.
"We have been increasing our portfolio's risk profile - very prudently and gradually - over the past six years and plan to continue to do so.
"When equity markets are strong, as they have been since the financial crisis in 2008, our portfolio will lag riskier peers, but in tougher times our returns should look attractive on a relative basis."
Language like this has continued to appear in official UTIMCO reports over the last few years.
In addition, UTIMCO's performance reports always emphasize their out-performance relative to their internal benchmarks. This out-performance is significant and persistent and something Mr. Zimmerman frequently alludes to.
Shifting goalposts
By 2016 there were a lot of new faces on the UTIMCO board.
There had been a 100 percent turnover since Mr. Zimmerman was hired in 2007, and six new members just in 2014-2015, most conspicuously Regents Vice President Jeffery Hildebrand and Mr. McRaven, who were chairman and vice-chairman, respectively.
We surmise that the new crew had re-evaluated the long-standing risk-return regime under which Mr. Zimmerman had been working.
There is a boiling resentment among voters around the country over rising tuition at public universities and public officials, elected or appointed, feel that burn.
And, the crisis of 2008-2009 is rapidly receding in memory. UTIMCO's relatively conservative portfolio weathered those years with smaller losses than most major schools, and everyone was pleased. But that was then and this is now. And the new crew seems to be more interested in what that policy has done for them lately.
PUF: the best little sovereign-wealth fund in Texas
There's another, peculiarly Texan piece to this puzzle. Without delving deep into UTIMCO bookkeeping, we should at least mention that the endowment funds managed by UTIMCO are kept in two separate pockets: PUF and GEF.
These may sound like Saturday-morning cartoon characters, but they denote the Permanent University Fund and General Endowment Fund, respectively. Their investment returns are similar, but they are differently funded.
PUF, now worth over $17 billion, is essentially a sovereign-wealth fund and is much older than UTIMCO, dating back to the 19th century. It was set up to receive the income from the state's 2.1 million acres of public lands, mostly in sparsely-settled West Texas. The fruits weren't much at first, consisting mostly of fees from cattle-grazing. But that all changed in 1923 when drillers struck oil on PUF land in Reagan County.
By law, two-thirds of PUF income goes to the UT System and one-third to the Texas A&M System. Those oil and gas revenues have made UTIMCO and, therefore, UT and TAM rich, but it puts them in somewhat the same position as any commodity-rich country. Gyrations in world prices and changes in technology make annual revenues volatile.
As of February 2016, eight months before Mr. Zimmerman's departure, oil prices had plummeted, with West Texas Intermediate trading at less than $27 a barrel, down more than 70% from its 2014 high.
Annual oil money flowing into PUF peaked at $1.1 billion in 2014, driven up by advances in hydraulic fracturing and horizontal drilling which increased production volume. But by FY 2016 revenues had fallen to just $512.3 million, a 60 percent drop as prices fell and some drillers gave up.
This was not a huge hit relative to UTIMCO's total assets and returns, and the oil market has roller-coastered before, but the UTIMCO board contains many people close to the oil industry, including Chairman Hildebrand. They are acutely sensitive to the ebb and flow of oil and gas revenues and these trends probably affect their views on UTIMCO's investment policies.
Show us the money
What the triggering event was in changing CIOs, we can't say. FY 2016 returns were slightly negative (see top 25 chart below) but they were still quite good in a bad year when compared to peer endowments. At some point, however, there was clearly a consensual shift.
In August the UTIMCO board decided they needed an official, designated back-up to the CIO, and Mark J. Warner, a senior managing director was, in effect, made deputy CIO, although he wasn't given that title. That permitted Mr. Zimmerman to take a rare two-week vacation in September with Mr. Warner in charge.
A few weeks later, just back from vacation, he was suddenly gone and Mr. Warner was named interim CEO and CIO.
We can get a hint about how the wind was blowing from an interview Mr. McRaven gave to Bloomberg reporter Michael McDonald just a few days later.
"For whatever reason, we just couldn't get the returns we were looking for. We're always looking for more money."..."We need UTIMCO to deliver the amount of money we need to fund higher education."
He also noted that "Bruce did a great job for us." But his priorities were pretty clear.
Whoever interviews for this position shouldn't have to wonder about his mandate. Higher returns are required and that will probably require higher risk.
And speaking of endowment returns, as you can see from our top 25 endowment chart below, fiscal 2016 was not an easy year for any endowment chief investment officer.
Among these big funds, both private and public, UT/UTIMCO did quite well in FY2016, ranked 9th out of 25. They had the highest returns among the publics, except for Texas Permanent School Fund, and surpassed several Private Ivys, including Columbia, Penn, Dartmouth, Harvard and Cornell.
Largest 25 Endowments: Returns FY 2016
*Texas Permanent, Emory, UTIMCO FY Aug 31st All others Jun 30th
Ranking by FY2016 returns - 1, 3, 5, 10 years
NB: numbers by Charles Skorina & Co. and Bloomberg News
Charles Skorina works with leaders of Endowments, Foundations, and Institutional Asset Managers to recruit Board Members, Executives Officers, Chief Investment Officers and Fund Managers. Mr. Skorina also publishes THE SKORINA LETTER, a widely-read professional publication providing news, research and analysis on institutional asset managers and tax-exempt funds. Prior to founding CASCo, Mr. Skorina worked for JP MorganChase in New York City and Chicago and for Ernst & Young in Washington, D.C. Mr. Skorina graduated from Culver Academies, attended Michigan State University and The Middlebury Institute of International Studies at Monterey where he graduated with a BA, and earned a MBA in Finance from the University of Chicago. He served in the US Army as a Russian Linguist stationed in Japan. |