Valeant Burns Texas Endowment, Contributing to Investment Loss

  • Pharmaceutical stock drove underperformance, university says
  • Fund lost 4.3% in fiscal first half, trailing benchmark

The University of Texas is the latest investor to reveal it was burned by Valeant Pharmaceuticals International Inc., the once high-flying pharmaceutical company that is under scrutiny for its billing practices.

The investment management company overseeing the university’s $24 billion endowment, as well as some funds for Texas A&M University, said Thursday that one of the main reasons it trailed a performance benchmark in the first half of the fiscal year was because of Valeant. UTIMCO, as the nonprofit entity is known, said it holds the stock indirectly through stakes in hedge funds ValueAct Capital Management LLC and Viking Global Investors LP.

Valeant has been held up as an emblem of high pharmaceutical costs in the U.S., and is being investigated for buying the rights to old, inexpensive drugs and then significantly raising their prices. It was also criticized for using aggressive sales tactics to circumvent restrictions by the health insurers and pharmacy managers who oversee patients’ prescription drug benefits. New Chief Executive Officer Joseph Papa on Thursday made his first move to reset the company’s strategy with the creation of a committee responsible for drug pricing.

Trimmed Exposure

The endowment had an overall investment loss of 4.3 percent in the six months ended Feb. 29, which was about 1.4 percent worse than a benchmark used to measure itself against peers, it said. It attributed more than half of that underperformance to declines in the share price of Valeant.

“It could have been worse,” Amanda Hopper, a senior director at UTIMCO overseeing public equity, told endowment board directors at an annual meeting in Austin. She said that the university had trimmed its exposure to Valeant by pulling some money from the fund managers, and also benefited from the run up before the stock price collapsed last year.

Valeant’s shares, which have lost more than 85 percent of their value since their August peak, dropped less than one percent yesterday.

Outside Manager

Bruce Zimmerman, chief executive officer at UTIMCO, said that Valeant at its peak accounted for about 1 percent of the endowment’s investments. Documents from the annual meeting show that Viking managed almost 3 percent of endowment funds, while ValueAct was close behind as of Dec. 31.

The losses sparked a debate at the annual meeting of the university’s investment management company about the concentration of its portfolio. Zimmerman said that the top-performing university endowments tend to place bigger bets than the University of Texas.

“We’re spending a lot of time thinking about concentration,” he said. “If you’re going to be concentrated you better get it right.”

The university is also boosting bets on private equity and venture capital funds, which now account for $8.6 billion, or 35 percent, of the portfolio. Zimmerman said the trajectory is for the asset class to account for 40 percent. Hedge funds will shrink as a percentage of the overall portfolio, from 30 percent to 20 percent, according to investment staff.

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