Structuring and designing investment portfolios are Timothy Barrett’s passion, something he has done as the top investment official at three organizations. Barrett has been CIO at the Texas Tech University System Endowment since 2013, where he runs a unique endowment model. Prior to that, he was director, pension investments worldwide, at Eastman Kodak from 2010 to 2013. Barrett also worked as CIO and CEO at the San Bernardino County Employees’ Retirement Association in California from 1996 to 2010.
CIO: In the expected low-return environment in the coming decade, how are you positioning the endowment for maximum returns?
Barrett: The TTUS endowment fund is positioned to be more balanced to return drivers than the typical endowment fund model. We have a lower public equity allocation, currently 30%, comprised approximately one-third global active managers and two-thirds synthetic exposure managed internally. In addition, we have a substantial commitment to diversifying strategies, those uncorrelated with equity markets. The Diversifying Assets allocation is 20% of the overall portfolio. Last, we have a tail-hedging program. Taken together, we anticipate performing comparatively well in a downturn with the ability to re-risk when appropriate.
To compliment the lower-risk profile, we take on more idiosyncratic risk through our MCA program. That program puts separate accounts alongside fund commitments, either hedge funds or drawdown-style funds, allowing us to co-invest in a manager’s best ideas. Those best ideas portfolios, in aggregate, account for 20% of the endowment assets. Importantly, the aggregate performance of those portfolios are performing 2:1 compared to the funds themselves. To be fair, we are taking more concentration risk and more illiquidity risk. However, we believe that lowering our beta risk and increasing the idiosyncratic risk at these levels will substantially improve our overall returns in the expected low-return environment.
CIO: Private markets appear to be a big part of portfolio, around 30%. Are there any new innovative strategies you’ve been tackling in that area?
Barrett: Within private markets, we have built out a bar-belled approach in private equity, focusing on early-stage venture and growth equity, coupled with GP stakes in a few strategic private equity firms. Within Private Debt, we are focused on lending strategies, but more recently structured credit strategies within private mortgages and asset-backed, short-duration strategies, both which are attractive in the current environment. In lending strategies, we have leaned toward direct lending versus syndicated loans, with a preference toward lending in strong sectors, such as healthcare.
CIO: What is your biggest challenge going forward as chief investment officer?
Barrett: Concern over political risks, trade wars, and central bank balance sheet tightening coupled with interest rate increases are concerns for every investor. There is no one approach to address those issues, but a balanced approach at the lower end of one’s risk spectrum is a prudent stance. With that said, it is a difficult market today as valuations are fair, risks are elevated, and global growth appears to be slowing. While late-cycle periods are notorious for elevated volatility, they can also melt up rapidly, so being too risk-adverse can leave investors with regret. Again, balance—some tail hedging for protection coupled with modest risk assets is appropriate. Within real assets, we are primarily invested in oil and gas, both [exploration and production] as well as midstream, as well as real estate. There is concern in regard to these assets as global GDP slows.
CIO: What are you proudest of in your role as CIO?
Barrett: It is an honor to work in this industry and be able to have such a large, positive impact on colleagues and institutions. I am most proud of assisting a number of the people that have worked with me in becoming CIOs in their own right. Probably equally rewarding has been the ability to help pensioners be more secure and help defray costs for the Texas Tech University System.
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