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AUSTIN — Fearing unstable international financial markets and the possibility of high inflation, Texas' higher education investment managers have bought more than $500 million in gold.
The gold purchases represent only 3 percent of the University of Texas Investment Management Co.'s $22.3 billion in investment funds, but it indicates how deeply the fund managers are concerned about the global financial future.
With the state's endowment funds designed to generate a 5.1 percent distribution each year to the University of Texas and Texas A&M University, it is rare for the investment managers to put large sums of money into a commodity whose value usually only grows through inflation.
"Recently, we've added 3 percent, 3 percent of our portfolio, into gold as a protection against inflation, but even more as a lack of confidence in financial markets due to extraordinary government fiscal and monetary stimulus," UTIMCO CEO Bruce Zimmerman told the University of Texas board of regents Wednesday. "I wish I could tell you the future looked rosy. Unfortunately, that's not our view. At best, we believe the future is uncertain."
Other executives suggested the endowments have begun to recover from the staggering losses of 2008 and 2009.
UTIMCO manages investments for all UT system schools and for the Permanent University Fund, which provides money to both UT and A&M. Its assets dropped by almost $3 billion, to $20.5 billion in 2009.
It now is up to $22.3 billion.
"We feel like we've stabilized," said Scott Kelley, executive vice chancellor for business affairs.
Donations dropped sharply in 2009, too, with UT schools reporting almost $200 million less in gifts than it received in 2008. Zimmerman said donations have begun to pick up again.
Even so, the losses will continue to ripple through university budgets for years to come.
"There has been an erosion of purchasing power," said Bruce Myers, an investment adviser with Cambridge Associates.
Universities use money from their endowments for scholarships, faculty salaries and other priorities. Because most base their withdrawals on a three-year average, the impact of a few bad years can linger.
Zimmerman said he will ask regents next month to approve new investment targets. Wednesday's meeting was a preview of what investment managers may try.
For example, he said, high levels of debt in U.S. real estate will give UTIMCO some investment opportunities to buy distressed securities, but he said it also will mean the national recovery will be "a longer, slower workout."
If all goes well, he said the UTIMCO diversified investment portfolio will have a 5.82 percent rate of return. With a growing economy and falling inflation, that could go up to 7.53 percent. Zimmerman said, however, there is a possibility that economic growth will fall while inflation rises and that would cause the portfolio to lose 1.2 percent of its value.
Investments in gold, natural resources and hedge funds are a means of countering that possible trend, he said. He said most of the gold purchases have been through futures trading, but he said UTIMCO may take physical possession of some gold.
In other business, the UTIMCO board of directors voted to reverse a controversial policy that allowed them to co-invest with the state.
The University of Texas board of regents had adopted a ban on co-investment in 1999 after the Houston Chronicle reported on potential conflicts of interests with regents and the board of UTIMCO as they invested in the same private equity funds as the taxpayer-owned Permanent University Fund.
The UTIMCO board recommended dropping the policy in 2008. The argument was that the policy prevented board members from making investment recommendations on funds that they wanted to invest in themselves. Because of that, they argued, UTIMCO was missing investment opportunities.
The board heard Wednesday that no co-investment ever occurred and no meaningful investment tips had come in because of the policy.
The board voted to ask the UT board of regents at its August meeting to revert to the stricter ethics policy. (Houston Chronicle, 7.14.2010, atcliffe and Jeannieever, r.g.ratcliffe@chron.com - jeannie.kever@chron.com) http://www.chron.com/disp/story.mpl/business/7108909.html