Texas Tech’s Endowment Model, With Some Changes on the Horizon
Tim Barrett, who oversees Texas Tech $1.1 billion endowment and another $800 million in a related operating capital fund, incurred a 12.6% decline in the first quarter of this year. But Barrett says the endowment is coming back, and moreover, he has some good things on the horizon.
Since Tim arrived at Texas Tech in 2013, following stints at the Eastman Kodak and San Bernardino County pension funds, he has followed a playbook that utilizes a decidedly complicated asset allocation. It is made up of 30% in public equities, 20% in public debt, 30% in private assets (half of which is private equity), plus another 20% in a collection of instruments labeled “diversifying assets.” These have been everything from reinsurance to trade finance. Few assets are managed in-house: Barrett says Texas Tech has 17 “strategic relationships” with managers, although the Lubbock, Texas-based university co-invests with several of them. In addition, Texas Tech staff manages the portable alpha program where 25% of its beta exposure is through swaps, options, or futures with the collateral invested in a portfolio of market neutral hedge funds. The operating capital fund shares in all of the investments except the private diversifying and private equity exposures because of their longer lock ups and lack of liquidity, Barrett explains.
By the time the markets started heading south in February, Barrett says, “We had already decided to start cutting exposures” in several areas. CLOs were reduced by two-thirds, for example, but, “What we did have in CLOs and in oil deals got eviscerated.” Equities meanwhile, fell from about 35% of the portfolio to about 23% through a combination of sales and price declines.
“This hasn’t changed any of our views going forward,” he insists, adding, “We started re-risking in April.” These days, he says, “we’re still underweight in equities.” They’re at about 27%, and the target is still about 30%. But Barrett says, “I don’t think it’s time to step on the gas yet. The virus is still here. Maybe there will be a vaccine that works or maybe not.”
He’s remains a strong believer in portable alpha. “Our alpha pool has delivered 5% annualized returns since we’ve been doing it, so I’d say it’s held up well,” he notes, adding, “Where we ran into a few problems is we put on option trades that have underperformed on the beta side. It wasn’t the portable alpha that was the problem; it was our options trading.”
Still, there’s a couple of changes on the horizon. “We’ll probably build more liquidity in the portfolio,” he says. Unlike many institutions, Texas Tech has had only a few capital calls from its private equity managers, but he’s more concerned that some investments have turned out to be more illiquid than expected. For example, he says, “We had a few mid-market loans, and no one’s trading them.”
Meanwhile, Barrett is looking at some new directions: “We have a big portfolio of converts, and we’re looking at another manager for more exposure because we think the run will be really good.”
And he thinks several current macroeconomic trends may also lead the portfolio into new territory. For example, he thinks the world’s central banks did the right thing with their whatever-it-takes response when markets turned sour earlier this year. But he worries that the monetary expansion may mean a bout of inflation, and he suspects “that’s what the Fed wants because they’ve created all this debt,” and they would presumably be happy to pay it off with cheaper money.
If there’s going to be inflation, Barrett figures, “that’s where real assets come in” for investors. He sees an opportunity in energy because of “all the money that’s left the oil and gas field.” In his view, “you can’t go 100% green. Nobody can get it done overnight: You can’t just go to electric cars; that’s something that’s going to take a decade,” hence he expects a growing demand for oil. At times like this, “when prices are down, that’s when you start buying.” Beyond energy, he adds, “We’re also talking to commodities managers.”
In short, for Barrett, despite some losses, the focus now is on new opportunities going forward.
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