Texas Teachers Taking Alternative Investing to New Risks

Photographer: Matt Rainwaters/Bloomberg Markets via Bloomberg

Fund manager Britt Harris, center, shown here with his Texas A&M students, holds the top investing job at the Teacher Retirement System of Texas, which has more than $110 billion under management. Close

Fund manager Britt Harris, center, shown here with his Texas A&M students, holds the... Read More

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Photographer: Matt Rainwaters/Bloomberg Markets via Bloomberg

Fund manager Britt Harris, center, shown here with his Texas A&M students, holds the top investing job at the Teacher Retirement System of Texas, which has more than $110 billion under management.

After working for almost two decades as a money manager, Britt Harris at age 45 was what most people would consider a success. Bridgewater Associates LP’s Ray Dalio and Bob Prince had just tapped him to be chief executive officer of the world’s largest hedge fund.

A father of four, Harris also found time to coach his kids’ baseball teams and teach Bible classes at his church. Still, something was gnawing at him. “I didn’t sleep for one night,” the Texas native recalls. “I didn’t sleep for a week. Then, after not having slept for three months, I told Bob and Ray I wanted to resign.”

Although Prince and Dalio urged Harris to remain, he quit Bridgewater in June 2005 after just six months, Bloomberg Markets magazine reports in its July issue. Harris says he felt that he wasn’t contributing enough to the firm or the wider world, so he embarked on an 18-month-long search for meaning. He traveled to Asia and New Zealand. He tried teaching, setting up a class on investing at Texas A&M University, his alma mater.

Then, in late 2006, a headhunter approached him about taking the top investing job at the Teacher Retirement System of Texas.

It was a place where he could make an impact. With $110.3 billion under management as of March 31, TRS is the fifth- largest public pension plan in the U.S.

When Harris joined in 2007, the teachers fund wanted someone who could boost returns without making risky bets that could jeopardize the pensions of its 1.3 million public school teachers and state university employees. “It’s a plan I really care about,” says Harris, who’s now 54. “It’s my home state, a place I love.”

Double Squeeze

Pension funds across the U.S. are facing an unprecedented double squeeze: Baby boomers entering retirement are placing growing demands on resources, while investment returns during the past decade have dropped. Nationwide, public pensions faced more than $4 trillion in unfunded liabilities as of October, according to Joshua Rauh of Northwestern University.

At TRS, Harris is reacting by ramping up stakes in so- called alternative assets ranging from private equity to real estate to hedge funds. The Texas fund had about a third of its money in these investments at the end of March -- more than any of the 10 largest public pension funds, according to London researcher Preqin Ltd. The California Public Employees’ Retirement System has 25 percent of its $237.6 billion of assets in such investments.

Bridgewater Stake

Harris, a devout Christian with a taste for Texas barbecue, is also forming partnerships with Wall Street firms. He has pledged $3 billion each to two private-equity joint ventures, with Apollo Global Management LLC (APO) and KKR & Co. (KKR) He’ll be investing in individual deals with them rather than solely placing money in their funds, as other pension plans do. And in February, the Texas fund bought a 2.5 percent private- equity stake in Bridgewater, Harris’s former employer, for $250 million.

The moves are controversial. “Are they in the business of managing employee pensions or are they in the business of running hedge funds on Wall Street?” says Edward Siedle, a former Securities and Exchange Commission attorney who’s now in the private sector investigating pension fraud. “When you look at public pension partnerships with Wall Street, generally they end up bad for the public pensions and good for Wall Street.”

Returns Improve

Harris, who recused himself from decision making on the Bridgewater investment, says the hedge fund has consistently made high returns and is an attractive investment.

Overall, returns at TRS have improved compared with its peers since the arrival of Harris, who in 2011 earned $480,000 of base salary and $396,950 in bonus pay. In 2007, the fund ranked behind 61 percent of other public pension funds in terms of returns, he says. Since then, it has been mostly in the top 25 percent. And in the three years ended on March 31, TRS gained an average of 17.8 percent annually compared with 16.1 percent for its peers, according to the Wilshire Trust Universe Comparison Service.

The average doesn’t tell the whole story, though. Last year, the fund gained only 4.5 percent. Harris needs to earn at least 8 percent each year or the state and members will have to contribute more money to the fund to pay out pensions. The shortfall increased 5 percent to $24 billion last year from $22.9 billion in 2010. In the next five years, almost 200,000 Texas teachers will reach retirement age.

10-Year Cycle

It may take another five years to determine whether Harris’s strategy of adding more alternative investments works, says Brian Guthrie, the fund’s executive director and Harris’s boss.

“To date, it hasn’t generated returns that we expected over time,” Guthrie says. “We expect the returns to reveal themselves as we get closer to the end of the 10-year cycle.”

The Texas fund’s size could be a handicap in meeting its goals. “The struggle with very large pension plans is, it takes time to allocate capital like that,” says Jim Hille, Harris’s predecessor, who now runs Texas Christian University’s $1.2 billion endowment in Fort Worth. “I was CIO for four years. It would take another six, and it’s taken Britt six, to get them where they want to be.”

Size as Handicap

TRS can’t be as nimble as smaller funds, says Bruce Zimmerman, chief investment officer of the University of Texas Investment Management Co., which manages the state university system’s $27.4 billion endowment. “The challenge is, you’re painting with a broad brush,” says Zimmerman, who previously ran Citigroup Inc.’s pension fund.

Harris has brought some of the trappings of Wall Street to Austin. When he arrived, the investment office’s 70 employees were housed on three different floors at TRS’s fortresslike headquarters, where thick columns run down the sides of the building to conserve energy. Space was so tight that some traders sat in a closet, while others spilled into the lobby.

Harris moved everyone to a sleek and airy 20,000-square- foot (1,900-square-meter) space on the 13th floor of a skyscraper on Congress Avenue, downtown Austin’s main drag, where a row of office buildings towers over the flat surrounding area. He increased total staff to 120 people, adding capabilities in private equity, real estate and risk management, and also boosted base salaries by an average of 24 percent.

George W. Bush

Harris’s office has a tank of tropical fish and a view of the pink-granite state capitol. On his bookshelves are pictures of his four children, a black-and-white shot of his grandparents on horseback and a photo of him with George W. Bush.

“People said, ‘Why in the world will you go to this fund? You’re not going to learn anything,’” Harris says. He cites an aphorism by fellow Texan Bob Buford, a former cable TV executive and management consultant: “The first half of the career is about achieving success; the second is about achieving significance. People who do not make the shift struggle.”

Harris’s midcareer transition echoes that of his father, a sales executive at what was then Mobil Corp. (XOM) who became a pastor at age 33 following a brush with cancer. After stints for the oil company in Turkey and Connecticut, Tom Harris moved his family to Fort Worth, Texas, where he attended a seminary.

When Britt Harris enrolled at Texas A&M, he became a fourth-generation Aggie, as the school’s students are known. After graduating in 1980 with a degree in finance, he joined Texas Utilities in Dallas in the accounting department and eventually was promoted to managing the company’s $300 million in investments.

Verizon Post

The job led him to a series of positions as a money manager, culminating in 13 years overseeing the pension fund of GTE Corp., the predecessor company to mobile-phone-service provider Verizon Communications Inc. (VZ), in Stamford, Connecticut. At the fund’s peak in 2000, Harris managed $80 billion.

At GTE, instead of buying products that outside fund managers were selling, he forged customized deals with specific performance, risk and fee guidelines. That was a novel idea at the time, says Afsaneh Beschloss, CEO of Rock Creek Group in Washington, which manages $7 billion in investments for institutions including TRS. Beschloss says she emulated his strategy in her previous position managing $65 billion in assets at the World Bank in the late 1990s.

‘Natural Leader’

Harris was one of the first corporate pension managers to buy into hedge funds in the early 2000s, says Prince, who met Harris through their children’s school in Connecticut. “Britt’s a natural leader,” Prince says. “He’s what we call a shaper: a person who forms an independent view about how things should be and makes it happen.”

Westport, Connecticut-based Bridgewater encouraged all employees to express their views: Meetings of senior executives are taped, and junior staff are welcome to criticize decisions. Harris’s job was to oversee customer service and strategy, not to help manage Bridgewater’s $124 billion in assets. “They had all the customers and customer service they could possibly want,” Harris says. “I doubt Bridgewater needed me.” Many of Bridgewater’s hires leave within two years.

Back in Texas, Harris is relishing the chance to lead again, whether at the men’s Bible class he teaches on Monday nights or at Texas A&M. His own experience forms part of the curriculum one late March evening in College Station, where 16 students attend his Titans of Investing class. Harris lumbers to the front of the room and begins describing the behemoth where he works.

Barbecue and Jalapenos

“We are the strongest hands that exist,” he tells the class, his voice rising and his arms waving. “We’re large, we’re long term, we’re liquid and we’re not levered. You cannot knock us out.”

Afterward, he joins the class for a dinner of brisket and creamed corn at Rudy’s, a local barbecue joint. Harris is smiling and confident, ambling from table to table, telling tales of his youth, such as the time he won a jalapeno-eating competition at age 17, downing 50 chilies.

Even though the outcome of his investment strategy remains to be seen, Harris says he’s now sleeping at night. “I am blessed to be here at Texas Teachers,” he says. Future pensioners hope that they will be as fortunate.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net

To contact the editor responsible for this story: Laura Colby at lcolby@bloomberg.net

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