In late February, Britt Harris gave a presentation to the board of the Texas Teachers Retirement System (TRS), outlining his expectations for the investment environment over the next five years. The news wasn’t exactly rosy.
The then-chief investment officer of TRS told his audience, which included members of the nine-person retirement board as well as various staff members, that it had done an incredible job over the past five years, returning 9.2 percent on an annualized basis over the period with very little risk. But going forward, Harris said, given economic projections including the expected interest rate environment and Treasury policies, the fund would be looking at returns of around seven percent at best — making it hard for the Austin, Texas-based, $134 billion retirement system to reach its annualized assumed rate of return of 8 percent.
Harris outlined this doom-and-gloom scenario for the TRS board. But while he may have laid the groundwork to deal with the tough times ahead, Harris himself will not be around to steer TRS through the turbulence. Late last week it was announced that he would be joining The University of Texas/Texas A&M Investment Management Co., or UTIMCO, as CEO, CIO and president. The Austin, Texas-based investment management company oversees $40 billion.
At the February TRS board presentation, Harris warned that at some point over the next five years, the U.S. is likely to tip into an inflationary environment — something that has not happened in a long time. That kind of investment landscape is very different from what U.S. asset owners are used to dealing with, given that the decades since the late 1970’s have tended to fall into two categories: periods of economic growth or periods of turbulence characterized by low rates. The types of assets that offer a hedge against these turbulent markets – private equity, long bonds, and absolute return – don’t offer the same types of protection in an inflationary environment.
“An inflationary hedge is actually hard,” said Harris. “When you fall into an inflationary hedge there really are no symmetric hedges” other than to short long-dated bonds, he explained. TRS, Harris said, had in place strategies designed to protect it during an inflationary environment, but it was still going to be tough. All the more so, warned board chair R. David Kelly, given that the impact of rising costs would disproportionately hurt TRS benefices and retirees and could cause the state legislature to need to raise benefits — putting even more pressure on pension liabilities.
“I think we are on the cusp of a very treacherous moment,” warned Kelly, the chairman and CEO of Texas-based real estate investing firm Croesus & Company. “We could get the negative trifecta if we are not careful,” he said, referring to a combination of low or even negative returns, rising costs of living and rising pension benefits.
Harris also said that agility is going to be extremely important in the future — a trait that is hard for big institutions like big pension plans and sovereign wealth funds to have.
The February meeting was not all doom and gloom. Harris spoke highly of the work that the pension system had achieved over the past several years, since the 2008 market crash, and how the plan had transformed the investment office and streamlined the oversight and governance processes. “This is a really robust, high-class agency structure,” Harris said, praising the way TRS operates. “This is the highest fiduciary standard that you can possibly meet.” The CIO also had good things to say about the pension’s risk management and investment processes.
Given the success Harris and his team have had over the decade since the former Verizon pension head joined the pension plan, and the success over the last five years of building out the direct investment team in particular, why would Harris now leave for crosstown rival UTIMCO? Certainly, he will be well compensated. Bloomberg reported that Harris, 59, will be paid at least $2 million for his first year. There is also the prestige of running a university endowment.
One other consideration, however, may have been the unique challenges of running a public pension plan over the coming economic cycle as opposed to a university endowment. Unlike pension funds, which need to reach an assumed rate of return of typically around seven percent or higher, endowments need only pay out five percent of their assets a year.
