The 2016 Innovators

Endowment

Texas Tech University System

Tim Barrett, CIO
Austin, Texas
Art by Thomas Fuchs

Tim Barrett is a difficult guy to get a hold of. Not for the obvious reason that he’s busy running a billion dollar fund—but because his phone is malfunctioning.

Despite the technical difficulties, Barrett launches straight into what sets Texas Tech University’s endowment apart. Pay attention fund managers—you’ll want to hear this.

Investment innovation is almost secondary for Barrett’s team; the “balanced” portfolio includes diversifying strategies such as reinsurance, trade finance, and gold mine rights. For Texas Tech, it’s how these investments are made that truly sets the fund apart from its peers.

“With one emerging markets manager we have, we’re in a couple of funds within an MCA structure,” he says.

MCA? This is a new acronym for CIO.

“It’s a master custody account—it came out of San Bernardino,” Barrett explains, referring to his time at the county’s public fund between 1996 and 2010. “It’s a way to contract a manager that allows direct investment.”

Within the MCA, the endowment is invested in two of the manager’s pooled funds. Alongside these funds sits a separate account with a much lower fee. “The idea with this is they pitch us any trade or idea they have that they think is value-add,” Barrett continues. MCA-held direct investments have gained three times as much as pooled funds in some cases, he says.

All these sub-funds and direct investments are wrapped within the MCA, which has its own “relationship fee”—1 and 20 in this case. At the end of each year, the fees paid for the sub-funds are compared to what the relationship fee would have been, and any excess is rebated to the endowment.

Alignment of interests, lower fees, and access to best ideas: Why aren’t more investors doing this?

“If you have board-driven investment selection, an MCA doesn’t make sense,” Barrett says. “The staff needs the hire-and-fire ability to make decisions.” While Barrett first implemented MCAs at San Bernardino County Employees’ Retirement Association, he says it is often much harder for corporate and public funds to embrace this structure—though the idea might soon be taught at Harvard, Barrett adds.

Barrett has introduced 12 MCAs into the Texas Tech portfolio since taking charge in 2013 as part of a “complete restructuring” of the endowment. At least 75% of the portfolio has changed from the one he inherited when he joined from Eastman Kodak. “I think the vast majority of it is done,” Barrett says of the overhaul. “We are now building—I’ve hired two deputy CIOs, so the team has expanded, and I would say the talent level of the team has dramatically expanded.”

Exhibit A: Forty Under Forty alum Robert Lee joined from the Employees Retirement System of Texas earlier this year, alongside Dan Parker from the Helmsley Charitable Trust. Parker is spearheading the endowment’s first move into venture capital, while Lee is focusing on collateral for the fund’s derivatives portfolio and real assets.

The trio aren’t finished. Future plans involve a more direct approach to oil and gas, joint ventures, and mineral rights, Barrett says. “A lot involves closer partnerships with the people that are doing the deals, and less in fund structures over time,” the CIO concludes. Let’s hope the phones work.

Nick Reeve

 

Endowment Finalists

  1. Emory University

    (Mary Cahill)
  2. Institute for Advanced Study

    (Mark Baumgartner)
  3. University of Chicago

    (Mark Schmid)
  4. University of Southern California

    (Lisa Mazzocco)
  5. Williams College

    (Collette Chilton)
  1. Foundation
  2. Public Defined
    Benefit Plan
    $15b to $100b
  1. Endowment
  2. Public Defined
    Benefit Plan
    Above $100b
  1. Corporate Defined
    Benefit Pension Plan
    Below $5b
  2. Health Care
  1. Corporate Defined
    Benefit Pension Plan
    Above $5b
  2. Defined Contribution
  1. Public Defined
    Benefit Plan
    Below $15b