Outperformance fees demanded by fund managers in low-return markets are an unfair flaw in the financial system, says veteran US institutional investor Britt Harris.
In a conversation with McKinsey & Co analysts published on the management consulting giant’s website, Mr Harris, who is president and CIO of the University of Texas Investment Management Company (UTIMCO) and founder of the so-called ‘Texas way’ of investing, has outlined his view on how institutional investors should optimally work with external fund managers.
Dismissing the so-called ‘Canadian model’ of bringing investment management capability in-house, Mr Harris said UTIMCO prefers to carefully select managers and work with them over the long-term.
“We don’t believe in one-night stands,” the Austin-based investor said.
He also urged entities that are working with external fund managers to ensure they are getting a “fair and just” deal when negotiating, arguing that all too often the industry has been pushing for unfair commercial terms.
“The hedge fund community has produced net results that are not fair and just over the past 10 years,” Mr Harris said.
“They fooled the whole industry by saying that when you’re in a low-return environment, alpha is more important, so therefore it’s okay if we keep more of it. I disagree. When returns are lower on a gross basis, the customer needs more of that, not less of it.
“You have to think through the flaws in the current model. The big flaw in the current model, where we can help them out, is that we can actually pay for outperformance in a down market.”
Under the ‘Texas way’ of investing, trust is more important than knowledge or performance, Mr Harris said.
The veteran investor outlined what he looks for when recruiting talent to work at UTIMCO – an activity he said is key to the performance of investment organisations.
“If you want to win the game, it’s the plan plus the people,” Mr Harris said. “You have to attract A players. In my view, they have a few consistent features.
“One, high character; two, high intelligence; three, they’re fully engaged in everything they do; four, team player; and five, willing to take individual responsibility. You put those kinds of people in the right kind of structure and give them support, and they’re going to do amazing things.”
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