US Fiscal Showdown Dents Investors’ Confidence

(October 30, 2013) – The global level of investors’ confidence dived into a feeling of pessimism in October, driven by US investors’ disappointment with their country’s government shutdown.

State Street’s monthly analysis of investor sentiment showed investors in North America recording a substantial drop in confidence from 104.3—a positive rating—to 86.5.

The decline was so steep that it dragged the worldwide investor confidence levels into negative territory for the first time since May, down from 101.3 in September to 95.7 in October.

By contrast, confidence improved substantially among European institutional investors, reflected in a 10.2 point increase in the European confidence levels to 111.9—its highest recording since July 2007.

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Asian investors stayed their course, resulting in the Asian index recording a modest change, rising 0.9 points to finish at 96.2—still in negative territory.

“The fiscal showdown in the US clearly took the wind from the sails of institutional investors,” said Paul O’Connell, co-author of the report and vice president and senior researcher of State Street Global Markets.

“Notwithstanding the 11th hour resolution of the immediate crisis, investors are aware that the long-term fiscal policy of the US remains to be negotiated, and that the impact of such negotiations on growth and confidence is yet to be seen.”

His colleague Michael Metcalfe, head of cross strategy research at State Street Global Markets, said that by contrast, the rise in investor confidence in Europe showed that they hoped the worst of the Eurozone crisis was now behind them.

“The US crisis of confidence, in contrast, may just be the beginning, unless policy uncertainty is reduced,” he added.

Russell Investments is also concerned about the impact of US politics on investors’ confidence levels. In its fourth quarter “Strategists’ outlook and barometer”, the authors found a US political tug-of-war remains a great threat to economic recovery.

“The eleventh-hour deal we have just witnessed is just another round of Congressional ‘kick the can,’” said Mike Dueker, chief economist at Russell.

According to the report, policy mistakes could cause anxiety in the bond markets as well as a decline in confidence in the US economy. But the biggest problem of all was a possible halt in the “momentum” of the economy.

If politicians could reach a reasonable fiscal deal, Russell said the US could expect to see almost 3% growth and an average of 200,000 more jobs per month next year. It also predicted 10-year US treasury yields would reach 2.8% in the first quarter of 2014 and 3.2% by the end of the year.

UBS is more positive—in its recent Global Economics Perspectives note, its economists predicted that the government shutdown would not produce any “lasting damage” to the economy.

State Street’s index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.

The greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral, where investors are neither increasing nor decreasing their long-term allocations to risky assets.

With stints at Verizon Investment Management, Bridgewater Associates, and the Teacher Retirement System of Texas, Harris’ has spent upwards of 25 years in institutional asset management.

(October 30, 2013)—Thomas “Britt” Harris, CIO of the Teacher Retirement System of Texas and longtime asset-management industry stalwart, will be the 2013 recipient of aiCIO’s Lifetime Achievement Award.

Previous winners of this award include NISA Investment Advisors’ Jess Yawitz and Bill Marshall (2011), and Strategic Investment Group’s Hilda Ochoa-Brillembourg (2012).

Harris, a Texas A&M graduate, began his career with stints at energy company Texas Utilities and power/automation giant ABB.

He then moved to Verizon Investment Management, which oversees the company’s employee benefit investments, as CIO. There, he ran a team of investment professionals responsible for billions in retirement assets—one known as a pension investment talent incubator.

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One product of Harris’ unit is Robin Diamonte, current CIO at United Technologies. Of her time working under Harris at Verizon, she said: “Working with Britt was like a being on Star Trek’s Starship Enterprise: You never knew what brave new world he was going to want to explore next.

“At Verizon, we had researchers, portfolios managers, traders, and strategic partners all waiting for the next idea. We were never quite finished implementing one strategy, before we were all charging off to go analyze the next opportunity.”

In 2004, Harris left Verizon to become CEO of Ray Dalio’s Bridgewater Associates, the world’s largest hedge fund. While his tenure at the Westport, Connecticut-based fund was short, his involvement with the firm would endure: in 2012, Texas Teachers (with Harris as CIO, although he recused himself from much of the process to avoid conflicts) would invest $250 million to buy a stake in Dalio’s enterprise.

Following Bridgewater, Harris decamped for the $115 billion Austin-based Teachers’ fund. There, among other successes, he has moved the fund aggressively into strategic partnerships with some of Wall Street’s biggest names. For example, private-equity giants KKR and Apollo Asset Management both received $3 billion from the fund in 2011 in what Harris refers to as “strategic partnerships.”

“These firms, they’re just so much more than they were 15 years ago,” he told aiCIO in 2012. “You hear of the Barbarians at the Gates days—what were these firms then? The answer was that they were doing US-only leveraged buyouts, and they were private. Today, they are global, they have multiple product lines, and they’re public. Really, this is still just the tip of the iceberg on these things.”

“We have seven strategic partners at the moment,” he said at the time. “Strategic partnerships mean different things to different people, of course. For us, we want to work with partners with multiple high-quality products and services. They must be able to customize those talents for our fund and our risk profile.

“They have to be global, they must be research-intensive, they have to share resources, the top people have to be engaged, and they have to have a comparable compensation philosophy—we’re performance-oriented people, and our key relationships must be too.”

Regarding the Bridgewater stake, Harris noted that it wasn’t even the largest deal of its type for the fund. ““With [our internal] team, firms [looking to find investors] can come to us now. They know they’ll get a good look confidentially, and that the outcome will be mutually beneficial. And they know it’s going to be quick,” he said. The deal, he noted, “was obviously unique, given my history with them. But we’ve made 10-15 principal transactions. Bridgewater isn’t even the largest one.”

Harris is candid about the strengths of public capital that allow Texas to pursue such investments. “When you talk about building a world-class asset-owner organization, you need to focus on the relative strengths,” he said. “Ours are obvious: We are large, very long term, liquid, and not very levered.”

Harris currently sits at #6 in aiCIO’s Power 100 Rankings. He will receive the award at the fourth-annual aiCIO Industry Innovation Awards on December 9, held at the New York Public Library.