Bruce Zimmerman: The TT Interview

Bruce Zimmerman, the chief executive officer and chief investment officer of the University of Texas Investment Management Company
Bruce Zimmerman, the chief executive officer and chief investment officer of the University of Texas Investment Management Company

Bruce Zimmerman recently celebrated his seventh anniversary as the CEO and chief investment officer at the University of Texas Investment Management Company, a nonprofit company that oversees investments for the University of Texas System and, to a lesser extent, the Texas A&M University System.

Created in 1996, UTIMCO, as it’s called, is a separate entity from the university systems it serves, and it oversees one of the largest pools of university assets in the country. That includes the Permanent University Fund, currently valued at almost $17 billion. Two-thirds of payouts from the PUF go to the UT System, and the remaining third goes to the A&M system. It is a major source of revenue for some of the state’s major higher education institutions that is largely fueled by royalties from booming oil and gas holdings in West Texas.

But with great wealth comes great responsibility. So to mark his anniversary at the company, Zimmerman sat down with The Texas Tribune to talk about his time at the helm and what he predicts for the future, including why he has some concerns.

He also touched on some of the major UTIMCO-related news stories of the past years, including its high-profile acquisition of large amounts of gold bullion worth hundreds of millions of dollars.

The following transcript of the conversation has been edited for length and clarity:

 

Texas Tribune: How are things at UTIMCO today relative to how you found them seven years ago?

Bruce Zimmerman: I feel really good about it. One of the numbers I looked at recently is that over the past seven years, the 60 of us at UTIMCO have added $3.7 billion of value, of resources of assets for UT and A&M. We’re able to track what investment returns would have been without us, because you don’t have to have us, and the difference is an extra $3.7 billion.

One way we look at that is that it’s about $525 million a year over the seven years. UTIMCO costs $25 million per year. So for every dollar that has been spent on UTIMCO, we’ve generated about $21 in return. I don’t think you need to be an investment expert to conclude that that’s a pretty good deal.

I’m also very happy about the team, the organization we have at UTIMCO, which is important because it’s nice to have done well over the last seven years, but what’s going to happen over the next seven years and the next 14 years is all about the strength of the team.

We like our portfolio. We’ve got a really good set of partners. We don’t invest in individual securities. We partner with the best investment managers around the world. We kind of invest in everything everywhere. When I think about our book, we have no weak areas. We’ve really developed areas, I think, of tremendous strength. Our hedge fund portfolio is $10 billion. Every metric we’ve ever looked at puts us as a top decile hedge fund portfolio. We really are kind of an investor of choice.

In our information technology venture capital book, we’ve got a reputation for being really good there. For example, we were one of the largest investors in Twitter — through two different venture capital funds. We invested a total through these two funds of about $5 million in Twitter. We made $250 million. That’s not a random example. It’s a pretty good example. I could go through more examples.

The last thing I’d say is that I think our — what I’ll call “constituent relations” — are really strong and have vastly improved. Seven years ago, for a whole host of reasons, there wasn’t a tremendous amount of confidence in UTIMCO from our client, the press or from our elected officials. So we committed to just be transparent and proactive in trying to let people know what we do and how we do it. I’ve always thought, if people know about us, they’ll be impressed and they will feel confident.

TT: What is the status of all the gold that started getting national attention a few years ago?

 

Zimmerman: Well, we still own it. Let me say right off the bat that what I underestimated was how publicity-worthy it apparently was. We approached it as just an investment like any other investment. When we thought about different future potential scenarios, there were certain scenarios where our portfolio would underperform its objectives. In those scenarios, having gold would be helpful.

We own about 3 percent of our portfolio in gold. We also have about 4 percent in venture capital. So in the mix of things, it’s not a major, major position for us. It was a hedge. But it’s unusual. It’s not typical. I think anytime anyone does something that’s not right down the middle of the fairway, people want to talk about it.

We’re sitting on a profit — not a large profit. The scenarios we were most concerned about haven’t come to fruition yet. They still may, which is why we really haven’t sold the gold.

What I like to say is that it represents 3 percent of our assets, probably about 5 to 7 percent of our discussion and thoughts — because it is unusual — and generates 98 percent of our press.

TT: The UT regents have been spending a lot of money from their endowment lately and recently announced plans to spend even more to keep tuition down for in-state students. Is that spending a cause for concern?

Zimmerman: Let me start by saying it’s up to the regents. It’s the regents’ decision. With the Permanent University Fund, there’s a limit by the state Constitution of 7 percent that can be spent each year.

The only reason a UTIMCO gets involved — I always like to remind people that we don’t raise the money, we don’t spend the money, we just invest the money — is that there’s a basic truism when it comes to endowments. There’s kind of a law of physics or mathematical equation, which says: Distribution rate plus inflation equals investment returns.

So if 5 percent is what is distributed every year and inflation is 2 percent, investment returns should be 7 percent. If investment returns are higher than that, we’re actually creating more money for future generations. If investment returns are lower than that, we’re actually taking money from future generations. That’s the basic mathematical formula.

There’s always pressure to spend more money. Always pressure to increase the distribution rate. Always has been, always will be. Currently, people don’t want to raise tuition, don’t want to raise taxes and state appropriations, and nobody likes to cut expenses. Everybody always wants more money. It’s human nature. So there’s natural pressure to find more money.

And the good news is that the oil and gas revenue royalty revenue that comes into the Permanent University Fund is growing. That’s a contribution. It’s the same thing as an alumnus making a donation.

Where I think there may be some confusion is a feeling that, because the contributions from West Texas revenue are increasing, the distribution rate should increase. So instead of spending 5 percent, spend 6 percent. Remember, the formula is distribution plus inflation equals investment returns. This contribution isn’t anywhere in the formula.

If the distribution rate goes from 5 percent to 6 percent and inflation is 2 percent, then we need to earn 8 percent. Again, it’s up to the regents, but that’s just basic endowment math. I think this year the regents have settled on a distribution rate of 5.5 percent, and they may increase it above that. The last few years, it’s been 5.7-ish percent.

The policy is 4.75 percent. Given that it’s been higher — 5.5 percent, 5.7 percent, and I think there’s a desire for it to be even higher — the question to UTIMCO is, can we earn more? Can we increase our investment return?

I think it’s a fair question. We’re working on that. It’s possible. It’s very difficult. It won’t happen overnight. So increasing the distribution rate before we get the investment return up is a risk. As we transform the portfolio to a high-earning portfolio, there are risks attendant with that. There’s no guarantee, first of all, but even if we are able to achieve it, it’s likely that there will be periods of greater volatility — higher highs, lower lows.

TT: But if the contribution from West Texas oil keeps going up, what’s the issue?

Zimmerman: You go back to the basic equation of distribution plus inflation equals investments. Now, the more contributions we get from West Texas, the greater the asset base is. When we do the math, if the distribution rate plus inflation is greater than investment returns, the line crosses.

At some point in the future, you’re actually distributing less money, less dollars, because you’ve pulled money forward. The math is fairly straightforward. So the lines will cross. The more contributions come in, they cross at a higher and higher level.

It’s a higher threshold, but they still cross. Whenever you’re distributing more than you’re returning on investments, you’re basically taking money from future generations. If your investment returns are higher than your distributions, you’re socking away money for future generations. It’s a straightforward piece of math.

TT: Do you have a sense of how close are we to crossing those lines at this point?

Zimmerman:  I don’t. And again, it’s not my decision. We’ve been kind of right on it for a number of years. Investment returns have been good. Inflation has been low. So at this 5.5 to 5.7 percent rate, we’ve been breaking even. We haven’t been socking away money for the future, and we haven’t been taking it from the future.

I would say the consensus among who I believe to be the more sophisticated investors is that we’ve got a lot of headwind. We’ve really enjoyed strong returns in the last four or five years. I think the next three to five years are going to be even tougher.

I get paid to worry, I think. So I do worry. 

Five years is kind of a medium term for us. Short term is a year or two. Medium term is three to seven years. Long term is eight, 10, 20 years. I have no idea what’s going to happen in the short term. In the medium term, it’s hard for me to imagine that we won’t have a problem of some magnitude.

When I think about the pressure the regents are under on the distribution side, I totally empathize with that. My job is to think about the pressure we’re under on the investment side.

TT: Is it tough to keep people straight on the separation between the entities, especially when University of Texas is in your name?

Zimmerman: It can be. We are an independent company. We’re a separate, not-for-profit company. We’re not part of the UT System. We’re not a state agency. 

Now, we’re controlled by a state agency. I report to a board of directors who are appointed by the UT System and the Texas A&M System. We have a single client, the UT System Board of Regents. We have two beneficiaries, the UT System and A&M System.

So it’s not like we’re some totally separate entity.

But legally, we’re not a state agency, and we’re not part of the UT or A&M System. We were set up purposefully like that so we could focus on being an excellent investment management company. So that we could retain the highest caliber investment professionals, which means you have to pay them differently than you would pay a public employee, because you’re competing in the private market for that talent. And so our investment decisions can be separate from any social or political considerations.

I was meeting with an elected official the other day, and this individual said, “I don’t think you ought to invest with the Koch brothers.”

I said that of course we’ll invest with the Koch brothers. What they do is legal. If we think we’re buying low and can sell high, we’ll absolutely do it. Some people say we shouldn’t invest with Soros. Well, of course we’ll invest with Soros — again, if what he’s doing is legal and we think we can buy low and sell high.

I smile a bit, because one of the social and political endeavors du jour — if you look at what endowments are doing in the Northeast — is to divest from fossil fuel programs. I haven’t seen a lot of people in Texas think that’s a really good idea.

Our mission is pretty straightforward. We exist to generate resources for UT and A&M. We’re not an economic development organization. We’re not a social cause organization. The more money we can generate for the health and academic institutions, the more those students, faculty, employees and doctors can pursue all the causes that are important to them. I don’t think anybody, including me, wants me to be making all these social and political calls.

Disclosure: The Texas A&M University System is a corporate sponsor of The Texas Tribune. A complete list of Texas Tribune donors and sponsors can be viewed here.