Having become Associate Vice Chancellor & CIO of the $1.6 billion Texas Tech University System in 2013, by way of Eastman Kodak and San Bernardino County Employees Retirement Association, Tim Barrett can fairly be described as an institutional investment expert.
So Alternatives Watch asked Barrett to share a few of his thoughts on how the current investment environment is impacting his investment outlook and his view of alternative assets.
AW: How would compare/contrast being the CIO of an educational endowment versus directing the investments of a retirement fund?
Barrett: Each institutional type, government pension, corporate pension and endowment have idiosyncratic complexities that a CIO must manage. For instance, government pensions calculate liabilities based on the long-term expected return while corporate plans discount off a blend of Treasury and corporate bonds. Of course, in an endowment there are no liabilities per se, but there is an annual spending requirement, typically 4-5%.
Pension plans are typically managed more conservatively. This is primarily because they typically have much larger assets under management. Hence, they cannot allocate meaningful capital to specific investment strategies, such as early-stage venture capital.
Another meaningful difference between the three types of institutional investors is governance. Public plans typically have the greatest oversight because many pension boards still make the final investment decisions. This decreases dramatically with corporate plans where the CIO typically has much more autonomy than a public pension CIO. Endowment funds typically have the least governance and correspondingly the most autonomy to make investment decisions. The smaller assets under management at endowment funds allow for more meaningful impact from niche strategies where capacity is limited.
AW: As CIO of a university endowment, what is your biggest investment concern for the fund in the current, volatile macroeconomic environment?
Barrett: The biggest concern currently is the potential for stagflation as that is the toughest type of environment to generate positive returns. Stagflation occurs when growth becomes less than inflation for prolonged periods. Commodities and real assets perform well in such an environment, while stocks and bonds deliver muted to negative performance. The majority of pension plans and endowments do not have the ability from a policy perspective to re-allocate enough assets to real assets to combat such a scenario playing out.
While that is my biggest concern, it is also not my base case scenario. Our base case is an aggressive Fed that pushes rates leading us directly into recession. The base case is further supported by the issues in Europe and China, combined with a massive component of global GDP, which will likely increase the likelihood of a global slowdown or recession.
AW: Currently, how would you rank your priority objectives this year as Texas Tech CIO?
Barrett: At Texas Tech, we have been restructuring the portfolio due to a change in the overall portfolio benchmark which is a global 60/40 portfolio. In addition to the change in benchmark, we have been keenly focused on reducing overall manager count. This priority will continue over the next few years as private asset managers return capital. A second priority is to continue to build internal dashboards that provide improved monitoring capability to staff. In short, using Power BI coupled with data from our performance management software, Caissa, we can build custom dashboards.
AW: How would you describe your investment outlook/philosophy concerning alternative assets?
Barrett: We utilize alternative assets across the portfolio. Depending on what you consider alternative assets, I would say that a majority of our portfolio is alternative. For instance, most of the stable value portfolio benchmarked against the Barclay’s Global Aggregate is alternative in that they are hedge funds. Within the growth portfolio, 40% is targeted to public equities with the other 20% in private equity.
AW: What is your long-term Investment Fund ‘s (LTIF) current exposure and policy exposure to alternative assets, and what new alternative assets do you think may have attractive prospects, i.e., Cryptocurrencies, infrastructure, or alternative energy perhaps?
Barrett: We do not have a policy limit or target to exposure to alternatives. We look through the underlying assets and market behavior to determine fit for the portfolio. For example, our equity market neutral fund trades equities long and short, but with little to no directional exposure. Instead of simply calling it a hedge fund and putting it in an alternative’s allocation, we would utilize it as a stable value asset in that is does not correlate with the broad equity markets.
There are several strategies I find interesting given the macro backdrop; yield farming utilizing stablecoins is an interesting strategy; utilizing infrastructure loans within a CLO structure is interesting in that it performs in line with CLO’s while providing much better downside protection. Last, there are some interesting SPAC related strategies that take advantage of the yields as well as warrants.
AW: What was the last book that you read?
Barrett: The last business-oriented book I read was Principles for Dealing with The Changing World Order by Ray Dalio. I also recently finished a Vince Flynn novel. I found it odd that reading about covert operations and assassinations via Vince Flynn’s character Mitch Rapp was more relaxing than thinking about the changing world order.