Institutional Investor's Alpha Magazine - February 2009 - (Page 51)

& Bockius instead, only to terminate that contract on December 17 because Morgan Lewis had recently repped another TRS client in a TRS investment transaction, a violation of state contracting guidelines. “The pieces of the puzzle don’t all ﬁt together,” says State Senator Duncan, who, as chairman of the State Affairs Committee, convened hearings last August into the switch in ﬁduciary counsels. “It’s easy to overreact, but I’d rather be proactive.” He notes that TRS’s expanded authority comes up for review in 2011. Duncan and other ofﬁcials worry that, even as falling markets threaten TRS’s funding status, the board may be swayed to make politically driven investments. Perry, who plans to run for reelection in 2010, has a history of proposing pet projects to large state funds. In 2003 he urged TRS to consider a plan put forward by UBS vice chairman and former U.S. senator Phil Gramm, a Perry supporter, to buy life insurance on retired educators that would funnel death beneﬁts to the pension fund. In 2006 a Perry aide proposed that TRS invest as much as $600 million in start-up companies funded by the state-run Texas Emerging Technology Fund. Neither proposal was put to a board vote. Now the Texas Department of Transportation is urging TRS to consider investing in private toll roads in Texas, among other infrastructure projects, in a program supported by Perry and other Republican leaders. Critics also fear that the growing reliance on external managers could lead to pay-to-play abuses, in which money managers make campaign contributions in exchange for mandates. As Henry puts it, “We were led to believe there might be less disclosure — that board members would not have to disclose when they had visited with vendors or sat in on meetings where investments are decided.” Campos tells Alpha that he wanted to bring in experts to develop “best practice” policies and says any suggestion he would facilitate anyone’s political agenda is an insult to his reputation — and absurd, given that he has never met Perry and had been a champion of investor rights while serving on the SEC. S tate legislators recognized a decade ago that TRS was overexposed to domestic stocks, but tensions with the pension fund hampered diversiﬁcation efforts. Although the legislature in 1999 authorized putting up to 4 percent of assets into private equity and hedge funds, it kept the fund on a tight leash. In the early 1990s executives at TRS annoyed legislators when they crossed into politics, working with unions lobbying lawmakers to boost beneﬁts. Lawmakers were stunned by a 1993 report by then–attorney general Dan Morales that found “pervasive conﬂicts of interest” in TRS’s real estate operations — including instances in which consultants paid for TRS staff junkets to Las Vegas and overseas — that might have contributed to nearly $500 million in losses in the 1980s. The report detailed lavish spending by TRS, including $18.7 million to build a new headquarters in Austin with a fortresslike façade and a soaring marble- lined lobby and $1 million more for furniture, artwork, a weight room, a greenhouse and other items. TRS, which was mostly passively managed and in stocks and bonds, performed well in the late-1990s boom: Assets climbed from $62.2 billion in August 1997 to $90.0 billion in 2000. What’s more, the in-house approach meant the cost of running the portfolio was minimal — only about 2 basis points annually, says executive director Ronnie Jung, Harris’s boss. TRS made its ﬁrst foray into alternatives, with legislative approval, in 2000 but moved slowly because it lacked the necessary manpower and systems. Then the tech bubble burst and assets plunged. In 2005, Governor Perry replaced TRS board chairman Terence Ellis, a retired managing partner from Nicholas-Applegate Capital Management in Houston, with Jarvis Hollingsworth, an attorney in the Houston ofﬁce of Bracewell & Patterson, now Bracewell & Giuliani. (Perry, like Lee, supported Giuliani in last year’s GOP primaries.) In March 2006 the CIO position opened up when James Hille left to run the endowment at Texas Christian University, his alma mater. Enter Harris. “Every day when I come to work, I’ve got 1.2 million people to think about,” Harris says. “It’s very clear to me what they do and how important they are, because all I have to do is think about my mother.” Harris, 50, who keeps a well-thumbed Bible in his ofﬁce, speaks with an evangelical zeal inherited from his father. From age three Ronnie Jung, executive director of the Texas TRS, says in-house management costs were minimal FEBRUARY 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 51

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2009

Institutional Investor's Alpha Magazine - February 2009 Contents Letter From the Editor Longs & Shorts Digging Out A Call to Mentor Dicey Detroit The Constant Skeptic Cover Story: The Undaunted What Were They Thinking? Dark Days in Greenwich True Stories from the Commodities Files Return of the Native The Quest for Cover Moving On from Madoff

Institutional Investor's Alpha Magazine - February 2009

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