Britt Harris and UTIMCO's Next CIO Rich Hall Discuss Plans for the Endowment's New Era

Britt Harris

When chief investment officers are ready to transition, they will often choose the player they think is most inclined to bring the fund to the next level. Britt Harris, who has managed more than a collective $500 billion in his lifetime as a chief investment officer at the University of Texas/Texas A&M Investment Management Company (UTIMCO), the Teacher Retirement System of Texas (TRS), and Verizon Investment Corp., and as CEO of Bridgewater Associates, announced on Dec. 9 that he has transitioned from his role as UTIMCO’s CIO, but is remaining at the firm as president and chief executive officer. At his recommendation, the board has appointed Deputy CIO Rich Hall to the chief investment officer position.

Rich Hall

Hall will oversee the $55 billion in endowment funds and $13 billion in operating funds on behalf of 300,000 students and 26 institutions across the University of Texas (UT) and Texas A&M systems.

Harris said he is preparing the investment team for what he foresees as the next generation of investors and global investment issues.

“Last year, we came out publicly and said we were ending a 40-year mega era,” he said. When Harris began his career, inflation was 14%, the S&P500 P/E was 8X and the discount rate was 20%. “Now, the discount rate is zero, and valuations are 21 and inflation was almost zero until recently. So we’ve ended the previous era. And what we have to figure out now is what the new era is going to look like, and that’s going to be Rich’s job with a little help from someone of my generation.”

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If inflation becomes a reality, and interest rates rise, UTIMCO’s new CIO said he is prepared to make appropriate adjustments to the portfolio.

In the new year, Hall will be watching the pace of global re-openings, following the latest variant of the coronavirus, and looking to see if parts of Asia can re-open industry on a sustained basis. Still unanswered is the extent of subsequent bottlenecks and price spikes following supply shortages—and their effects on margins and inflation.

“It’s really unresolved; global industry and trade have not yet fully returned to equilibrium,” Hall said.

Another part of the equation for the new year will be watching what the Federal Reserve does to manage liquidity and keep the economy on a solid footing while preventing the economy from overheating, he said. If the Fed tapers too quickly or raises rates more than expected, it could affect the fundamental pricing mechanism in the markets, as well as valuations.

“In the near term, we have modest risk positions relative to our asset allocations,” Hall said.

After 40 years of declining rates, if rates rise, the world could be facing an entirely different economic regime. “Let the economy normalize, get back to that pre-pandemic equilibrium,” Hall said, “Let’s see what the new equilibrium is going to be, and then adjust accordingly.”

Harris believes the “new era,” may be a paradigm shift where “everything is up for grabs” and if so, it will be up to the investment team to pull together and help Hall create a vision for the fund’s strategic future.

“I’ll be a scout for the company,” said Harris, who will be working on the strategic direction of the fund, for the next two to five years, “and frankly, the world.” (He’s planning an energy transition conference for 2022.)

Another transition the pair will be focusing on is the juxtaposition of human and artificial intelligence (AI). “We’ve ended the period of machines replacing physical labor. Now, everyone pays money to go to a gym because physical labor has been eliminated. What we’re in for now is a time when technology replaces mental labor. I have some concern that this may happen more quickly than most expect.”

The team will be exploring how technology will affect capital markets and the structure of industry and public policy.

“All that is going to come in like a storm, and people are not ready for it,” Harris said.

He and the investment team also will be studying future relationships with China.

Changes Made

In the past year, UTIMCO outperformed the benchmarks in each of its asset classes. Its venture capital portfolio performed in the top 1% of all venture portfolios in the Wilshire Trust Universe Comparison Service (TUCS) for the seven- and 10-year time frames, and, according to a June 29 report, showed an increase of 76% in the past year. (Part of it included the windfall of buying Coinbase in 2012 for 23 cents and selling it for $371 during its IPO.) In the past quarter, Harris and Hall hired new venture capital director, Craig Thomas, who is already creating solid relationships for UTIMCO; general counsel Carolina de Onis; and, 18 months ago, new Chief Technology Officer (CTO) Mike Sjolander.

When Harris came to UTIMCO in 2017, the oil and gas part of the endowment portfolio had grown to about 17%. But the University of Texas and Texas A&M system own 2 million acres of oil-rich land in western Texas, which has produced about $1 billion on average from oil and gas royalties annually over the past eight years or so. The surface of the oil-rich acreage also contains wind turbines, solar fields, and agricultural operations. With the University Lands creating significant fixed exposure to oil and gas, the choice was made to dial down the exposure in the endowment portfolios to about 5%, and design the oil and gas portfolio to be mostly opportunistic.

“We need to compensate and balance the risks that client has in other places,” Hall said.

Why Hall?

Hall had worked as the head of private equity when Harris was CIO at the Teacher Retirement System of Texas, before returning to his undergrad alma mater at Harvard Management Company as managing director and head of private equity. Reportedly, Harris called him back to UTIMCO in 2018 to groom him to become the next CIO.

Assets under management (AUM) have soared by $24 billion, roughly 30%, since Hall and Harris began working together again. Over the past three years, UTIMCO has generated a 15.9% return, with 2.2% outperformance compared to policy benchmarks, a top decile return compared to the broader universe of foundations and endowments tracked by the TUCS, according to a UTIMCO announcement.

Hall also served as an intelligence officer for six years in the U.S. Navy before earning his MBA from Northwestern University.

Harris said he sought a leader with the right character fit for UTIMCO’s mission to “eradicate poverty through higher education” and its ability to provide financial aid to more than 100,000 students who are eligible for Pell grants on the 14 UT and A&M campuses. (Both Hall and Harris note that their institutions have “ten times more students who receive these grants than the entire Ivy League combined.”)

Said Hall, “Someone who gets a college degree will earn, on average during their working lifetime, a million dollars more than someone who doesn’t. … And when you think about what that can do, to change the trajectory of that individual’s life, their ability to care for their family…”

The investment office also supports MD Anderson Cancer Center, the top hospital in the world for cancer treatment and research, and hosts a roster of inventors, with 207 utility patents filed last year.

“The people we want working here at UTIMCO are the people who are motivated and inspired to serve a mission and a cause that does greater good,” Hall said.

Harris, an executive professor who has taught “Titans of Investing” classes to close to 800 students at both A&M and UT, notes the qualities he most values in leaders at the fund: wisdom, fine preparation skills, courage, the ability to consistently demand excellence over adequacy, and respect for people over the pay.

“Whenever you leave, there should be two things going on. You should be sad and excited about where you are going. And you have to ask yourself, ‘Are you at peace with it?’” Harris said.

Harris, who once was a track and field athlete, compares passing the baton to Hall as if he is the star player who will win the championship: “He’s going to take us to the winners’ circle.”

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Tags: Britt Harris, Rich Hall, Texas Teacher Retirement System (TRS), University of Texas/Texas A&M Investment Management Company, UTIMCO

Inflation: transitory or intransigent? Escalating prices are the US public’s biggest worry. Even Federal Reserve Chair Jerome Powell has abandoned his use of the term “transitory” for a rising Consumer Price Index (CPI), which in November reached 6.8% year over year.

Well, hold on a minute, says David Rosenberg, president and CEO of Rosenberg Research. Inflation might be peaking, he contends. And it should abate sometime next year, in his view.

Evidence for his sanguine take: In a research note, he pointed to commodity prices starting to fall from their peaks. Rosenberg follows 30 commodities, including gasoline, tin, and wheat, which are off their highs. Gasoline, for instance, fell to $3.44 per gallon in December’s first week, down from a US high of $3.50 in November’s second week (gas started the year at $2.33).

Only a handful of commodities are still climbing, he wrote: milk, coffee, burlap, and cattle. In November, whole milk was $3.67 per gallon, up from $3.47 in January.

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To Rosenberg, who once was Merrill Lynch’s chief economist for North America, today’s inflation also stems from housing and “anything with a chip in it.” Housing will correct with new supply on the way, he predicted. What’s more, cure the supply bottlenecks and you cure the chip problem, as semiconductors began to proliferate, he declared.

“My outlook for the economy—for the lack of a better term in two words or less—is ‘muddle through,’” Rosenberg told Germany’s NZZOne website. “And that means inflation will come down next year.”

Housing costs have been swelling during the pandemic, adding to overall inflation, but Rosenberg argued that this will peter out by 2022’s second half. That’s when “the flood of multifamily units hits the real estate market,” he wrote. Reason: There is a construction boom underway for apartment buildings, to make up for a shortage that has dogged the housing industry since the 2008-09 financial crisis. “The multifamily housing segment is being driven by a demand for rentals as consumers move back to the city and remote workers prepare to return to their offices,” the National Association of Realtors observed in a research piece. Starts in the category jumped 20% most recently.

Inflation is top of mind for the public nowadays. In a University of Michigan consumer confidence survey, respondents ranked it as the biggest problem confronting the nation. That no doubt is why the Fed’s Powell shifted his description of inflation. On Wednesday, at the end of the Fed policymaking body’s two-day meeting, he is expected to announce accelerated tapering of the central bank’s bond-buying program, which is aimed at keeping long-term rates low—and he may even talk about lifting short-term rates higher sooner. Higher rates should be a brake on the inflation trend, the thinking goes. Not too long ago, the CPI was south of 2%.

The funny thing is that the fixed-income market isn’t as worried about inflation as the general public is. When the November CPI number was released Friday, the 10-year Treasury rate rose a mere 0.002 percentage point yield, to 1.487%. What’s more, the 10-year breakeven rate (what the futures market predicts for inflation) is 2.44%. That is nowhere near where the current CPI increase lies.

Rosenberg indicated that the severity and length of the current inflation increase surprised him. Still, the CPI surge won’t stick around, he added. “If you believed that transitory meant weeks, months, or even quarters, this is obviously not proving to be transitory,” he said. “But transitory truly defined just means an event that is expected to be short-term or brief in nature.”

Britt Harris and UTIMCO’s Next CIO Rich Hall Discuss Plans for the Endowment’s New Era

Changes Made

Why Hall?

Inflation, the Public’s Main Bogeyman, Is Peaking, Says Wall Street Savant