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Betting on Bling

August 30, 2010

News that the investment arm of the University of Texas has started buying up gold is validating the concerns of some analysts who fear high inflation and increasing U.S. debt will wreak havoc on other more commonly held endowment securities, such as bonds.

The University of Texas Investment Management Company (UTIMCO) announced last month that it would move $500 million into gold. While that constitutes just 3 percent of the $22.3 billion in assets UTIMCO controls, it’s a marked shift in strategy for a management company that had no gold in its portfolio a year ago.

Bruce Zimmerman, UTIMCO’s chief executive officer, described the gold investment as a “hedge,” which would protect the portfolio if a “lack of monetary and fiscal discipline on the part of governments” drives down the value of other assets. While not naming names, Zimmerman said he knew of several other endowment managers adopting the same strategy.

“I don’t believe we’re the only endowment [doing this],” he said. “We just happen to be public.”

Fund managers who are using gold to offset other risks are employing a fundamental principle of investment diversity, explains John Nelson, managing director of Moody’s Public Finance Group. Any endowment manager’s goal is to have a portfolio with assets that hold inverse relationships; in other words, if one asset declines in value, the other will increase in value and thereby hedge against risk, Nelson says.

“If you’re worried about inflation, and you’re worried about whether the U.S. dollar will hold its value less than it has historically, then gold is one of the few options you’d have,” Nelson said.

Given the fact that a gold investment strategy is predicated on the idea that the dollar is declining and the nation is too deep in debt, some have described the gaga for gold trend gripping the conservative movement – see Glenn Beck – as ideologically driven.

But you don’t have to be a conservative talk show host to see the merits of UTIMCO’s position, said Sandy Leeds, a senior lecturer of finance at the University of Texas at Austin’s McCombs School of Business. Leeds was so fired up by the news of UTIMCO’s strategy that he wrote an op-ed on the subject for The Houston Chronicle, which originally reported on a public meeting where the investments were discussed.

“While unstated by UTIMCO, we should consider the possibility that they are hedging against a U.S. meltdown,” Leeds wrote.

UTIMCO isn’t the only investor pursuing gold in this shaky economy. Indeed, gold futures climbed for the fourth straight week Friday, and it has gained 13 percent this year.

By investing in gold, UTIMCO is bracing for the possibility that inflation will outpace the returns the company is getting on some or many of its bonds, Leeds told Inside Higher Ed.

“In a high inflation environment, bonds will get crushed,” Leeds said.

Even so, gold is “notoriously volatile,” and “in real terms, it generally has not held its value in the last 25 years,” Nelson said. “It always spikes up when people are concerned about the future.”

That volatility may be among the reasons gold isn’t a fixture in a lot of college endowments, but talk of such investments is growing. John Paulson, president, portfolio manager, and director of Paulson & Co., recently championed gold at a meeting of the National Association of College and University Business Officers.

Matt Hamill, senior vice president of advocacy and issue analysis at NACUBO, said the association doesn’t have any hard data yet about whether gold investments are growing within college portfolios. If NACUBO’s next annual survey of asset allocations sees an uptick in commodities, however, that could indicate movement toward gold – and that would break with historic trends, he said. In 2009, the category that included commodities within alternative asset allocations comprised 12 percent of surveyed colleges' assets, according to a NACUBO-Commonfund survey.

“As a class [of assets], it’s not a standard part of every endowment manager's desired portfolio,” Hamill said.

 

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