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Tim Barrett is the CIO of Texas Tech, but he's also one of the few CIOs who has worked at both a public pension, a corporate pension, and then became a university CIO. He has this unique perspective.

Another thing about Barrett is he's known as a strategist intellectually. During this interview, we'll discuss what's happening with the economy, as well as some of the moves that he made throughout his career to improve the funds that he's worked at. Markets Group is about to honor Barrett with a Hall of Fame award during our Investors Conference in Austin, on October 8th and 9th. We'll honor Barrett, October 9th. Allocators, come on in.

To watch the interview on YouTube click here, or read the transcript below. 

Tim, welcome. How are you?

Tim Barrett, CIO of Texas Tech: Thank you. I'm great. Thank you.

Christine Giordano: Thank you so much for making time for this interview. Appreciate it. I'm going to just jump right in. As one of the few CIOs who's been at a public pension, a corporate pension, and then endowment, what in your opinion, is key to survival in each place?

Barrett: Right. That's a great question. The key to survival, obviously, for any CIO is actually performance when you boil it all down. If you don't perform, you're not going to stick around in any of those environments.

As important, I think, is performance is how you communicate and how you connect with people. Whether you're talking about a public pension board that would have lay people on it, say, from fire and police on your board or general employees of some government entity, to a corporate board that's with professional treasurers and CFOs on your board, to endowments that typically have investment professionals on their boards, there's quite a wide disparity of talent and understanding in those groups. Your ability to communicate with the fire and police guys about what you're doing in the portfolio and very complex investments is critical because you have to gain their support and their trust. The same can be said at the endowment level. Frankly, that's easier because you have more investment professionals on those boards and it's easier to communicate because that comes natural to a CIO is to talk about more complex things.

The real skill is to be able to boil down that complexity into smaller bite sizes so that lay people can understand it. Without that skill, I think it's very difficult to survive as a CIO in any of those environments.

Giordano: Tim, you came from a family of farmers and then went into finance. Did that come innately to you? When you discuss your day over the dinner table with your folks, how did you develop that skill in breaking things down?

Barrett: I do not think it really came from my youth, and how I was brought up. I wish I could say that I always innately had that skill. I think that's something that you learn over time by trial and error. I became a CIO pretty young at SBCERA after really three years in the industry. You had to pretty quickly adapt and learn to speak and be quick on your feet to be in that role. I think I just learned that over time.

Giordano: SBCERA meaning San Bernardino, right?

Barrett: San Bernardino County Employees' Retirement Association. Yes.

Christine: You were there from '96 to 2010?

Barrett: That's correct.

Giordano: Great. During that time, you were able to take that fund into the modern age. You implemented derivatives, private equity, full autonomy for the staff. Can you get into that?

Barrett: Yes, I think when you think about that plan and the way it was governed, we had a lot of support. We had a lot of support from the board to make changes over time. It was really a discussion with the consultant and I, Alan Martin, who was a great mentor of mine, that we talked about how do you get to a place with boards where you can implement things quicker and faster. We wanted to take advantage of co-investments. We wanted to take advantage of trading derivatives on the portfolio.

It's really a long process of having those discussions and getting Alan's support to talk to the board to allow us the authority to select managers to do co-investments, and also build out that portable alpha program. I would say that happened over multiple years. A lot of people think that I just walked in, I got this autonomy, and they said, "Oh, yes, take it, Barrett." That's not how things work. You have to earn that over time, and you slowly change it.

When you think about the board, they used to select the managers. They'd interview them and they'd select them. Then we got to a point where we got an agreement with the board where we're going to bring you a manager that we think is best fit, and it was automatic that they would select that manager. That's pseudo-autonomy, because they're allowing you to bring the manager, and they're selecting it almost no matter what unless there's some pretell on the side because they don't like the asset class or whatever.

Then you fast-forward that a couple of years, and then we just started updating the managers that we hired to them. That happened over a few-year period in that autonomy, and it also impacted performance. Our performance started improving dramatically so they were very happy with giving us that autonomy. That's how that worked.

Giordano: Other than suggesting good managers, it was the returns that made your case for autonomy, correct?

Barrett: I think it did. When you looked at the alpha that we created in our portable alpha program, and we also implemented what we called a smart beta. It was a tactical asset allocation overlay where we traded derivatives to move the portfolio around based on fundamental factors. We did that with a group called M-Cubed who had the software and technology to do it. That wildly outperformed the market. That tactical allocation added substantial value, and I think the board recognized that we were adding a lot of value and gave them comfort to continue with the autonomy that we had.

Giordano: Are you still using that strategy today?

Barrett: We aren't using the tactical allocation software strategy today, but we do tactically allocate. It's more on a subjective basis.

Giordano: How have you changed that?

Barrett: Before it was rules-driven at SBCERA, so that you built models and you ran based on those models. What we've done here is when we look at the market and we see big dislocations or changes, regime shifts, then we'll make shifts in the market. I think a perfect example would be if you look back about 18 months ago or so, we made a big push into quality. That's a massive tactical shift away from our benchmark. It's a factor bet.

That factor bet, I think, has outperformed 1,400 basis points over our index over that period. It really add substantial value. We'll probably keep that on for a while and we can talk about where we think markets are going, but we'll probably maintain that position for a while going forward. That's more indicative of what we do now.

I'd say the other piece that we do now is most of the portfolio in Texas Tech is alternatives. We don't have to take quite as many tilts and factor bets and things like that, that I would have years ago because there's managers and there's more managers and more differentiated strategies that we can select from.

In credit, for instance, we own a little bit of high yield. We don't own anything in the bar cap really. It's almost all credit hedge funds, and they're very direct, niche-y strategies that we want to target that we think are all-weather. These guys themselves at these hedge funds will tactically trade those credit markets where we don't have to internally, and provide that consistent return that we're targeting. It's really become a little bit more strategy-focused than tactical.

Giordano: Yes, maybe we should just continue with the career story in a little bit, but go right into the changes that you've been making recently now since you're on it.

Barrett: The portfolio, just to level set, is based on a global 60-40. Our benchmark is at global 60-40 plus 100, meaning 60% in the All-Country World Index, 40% in the Bar Cap. The way we structure it roughly is, of that 60, roughly 40% is public equities, roughly 20% is private equity-oriented things, so it could be a venture cap, buyouts, real assets, oil and gas. Then on the stable value side, that 40% is broken up between, let's call it more absolute return type hedge funds that's also used in portable alpha, and then more credit-oriented hedge funds and private credit, roughly evenly split 20% each.

The way we think about the portfolio is how can we build one of those substructures that dramatically outperform that benchmark, so that's always our starting point. From there, we look for opportunities and it could be little niche opportunities that we find. For instance, one of the things that we're looking at recently is nano sand for batteries. There's a company that we're digging in very deeply with, that takes rock, crushes it, runs it through a process. This nano sand has high conductivity compared to graphene, and can dramatically improve battery, both the storage and the speed with which it can take a charge.

That's the example of something really interesting that everybody in the office honestly is geeking out a little bit on. I don't know if we'll end up doing it, but it's an example of some of the things that we look at. When you think about the portfolio and tactical, we still like the quality that I mentioned before.

In fact, we were about 50-50 quality versus ACWI weights in our equity book. More recently, we put a hedge on to hedge out the semiconductor exposure in the quality benchmark back to ACWI weights to take risk off the table because we'd beaten the index by so much that we wanted to harvest some of those gains. We shorted out the differential. Then a few weeks ago you saw where the semiconductors really got hit and our shorts paid for themselves. I then turned around that same day and then we went long another 25% of quality to pick up the semis-- Not shorting out, to pick up the semis when they bounced back. We picked up that trade full circle.

As everybody was getting pessimistic about semiconductors and the economy, because that's what was going on when they traded off, it also had a major impact on rates. You saw the rate trade really change a lot. We sold out of a bunch of two-year paper, bought one-month paper, and captured that change in yields over that same period.

[chuckling]

I would say that those opportunities don't come around often. When they do, we try to capture some of that if we can. Sometimes they happen so quickly that you can't catch it. Sometimes there's a lot of luck involved. When we put the short on that semis, I had no idea that it was going to trade off the next week. We just took a look at the semis and they were up 78% last year. We were like, "I don't think it'll do it again. We should lock in our gains." Sometimes just the simple decision saying, "Hey, I'm going to take risk off the table," works in your favor.

Giordano: Are you seeing anything ahead in the equity or the rates market?

Barrett: Yes, we still think quality is really interesting through this part of the cycle. If you think about quality, they have really strong balance sheets and really strong fundamentals, right?

Giordano: Yes.

Barrett: If you think things could get tough in the near future, you'd rather be in quality than just straight growth. I think it does well if we start to stumble a little bit and go to recession and the Fed doesn't get the rate regime right by lowering rates. Where you'll see the regime shift, in my opinion, would be if you just fast forward and say, "Hey, they're going to get the lowering of rates perfect and they're going to glide us into a growth cycle again."

If you glide into a growth cycle, quality is wrong. What's right then? Small cap, growth, cyclical, and those things, that's where you need to shift. Really, it's a lot about reading those tea leaves, like what's going to move the economy to that growth phase. How are we going to get there? If those tea leaves starting to turn over and we're getting there, then you need to start moving to small cap, cyclicals, all those things.

Giordano: What are you watching for as far as that shift?

Barrett: Right. We're watching for what we think the normalized inflation rate is over time and where rates are. We don't want to see a big differential in those, we want to see those come together. Then I think the other things you want to watch is just the consumer. How are things going with the consumer? Are they holding up well? What are credit card delinquencies? You're looking for those tea leaves that say, "Hey, certain segments of the population are getting in trouble. The low-income earners are already starting to get in trouble. Where's the middle class at? Where's the upper class at?

You want to look at what those defaults are and see if the dominoes start falling, you want to start staying in quality and being a little more defensive. If things start turning and those things start to ebb a little bit and they're not getting as bad, then I think you're starting to get closer to the cyclical trade.

Giordano: Love it. Thank you. I'm going to return to your career because it's exciting in its own way. You were also at Eastman Kodak from 2010 to 2013. From there, you managed 77 global plans, 4 to 5 of them directly, all different boards. How did you do that? What was key to doing it right?

Barrett: The easiest way to explain how I did that is I traveled a lot. [chuckles] You're on a plane quite frequently going to those board meetings overseas. It keeps you quite busy. I think the biggest accomplishment there was consolidating the plans.

When I got there, those plans, the ones that we managed, were all different manager lineups and different asset allocations because they had different boards. That makes sense if you have a really big staff, but Kodak did not. It was me and the gentleman I hired was Tom Mucha, who was the previous CIO at Kodak, and a lady named Mary O'Reilly, who now is CIO at Excellus. The three of us ran all of that. You're talking of three people. It's very difficult to have that many managers and do a good job covering.

The very first order of business was, how can I take this US plan, restructure so it's tighter with less managers and then use those same managers in the global plans and convince different boards to do this? That took several months, but we got everybody on board with a plan. I will tell you the difference between a corporate and say a public fund or someone else is, even though there's all these different corporate boards that are in different countries, the head of global at Eastern Kodak, the treasurer, was on everyone of those boards and he was the head.

When you're going to convince, you're really convincing him that, "Hey, here's the game plan, here's how we're going to do it." He has a lot of influence with all these subsidiaries to do that. Part of it was getting on board with him and getting all these boards to agree that we're going to go with this new framework, we're going to consolidate managers off the US plan so that everybody's overlapped and it's a similar program across the whole entity. We were able to do that.

I'd say the other thing that was really important at Kodak is the endowment guys and pension funds don't think as much about its liability hedging. When I got to Kodak, they were over 100% funded but they were not very hedged in their liability hedging. Of course, it was around bankruptcy Time that I joined. It wasn't like they could afford to have a big hit.

The message from the treasurer was, don't lose money versus our liability stream. What are you going to do? The very first thing you do as a CIO is say, "Wait a minute. If I can't lose any money versus liability stream, what am I going to do?" You're going to invest your way out of that? You can't. You have to hedge your way out of that. We immediately went in and moved the liability hedging from the 70s to 95% hedged almost instantaneously. That removed that risk of underperforming your liability hedge, which in corporate speaks means you got to go pay money.

Giordano: [chuckles] That pension plan eventually became more than the valuation of the entire company, right?

Barrett: I can't take any credit for the valuation of the company. I wasn't involved on that side, but I believe the pension fund was worth more than the company. Yes. One of the fascinating things that happened in the European plan, which had never happened in European history before, at least in UK history, was one of our companies was in the UK, was a paper company. I forget there was another subsidiary of that as well. The parent company had guaranteed the liabilities of those entities, which was probably not a good idea.

In bankruptcy, those companies made an offer. that if Kodak forgave the liability and then they negotiated buying the companies themselves, that worked out phenomenal because Kodak was never going to pay the liabilities of those companies. They're going to negotiate buying themselves, disassociating from the pension, and then reattaching afterwards, which had never been done in history.

The bottom line is what happened is you went from 30 cents on the dollar that each pensioner was going to get through the bankruptcy process, to making those legal moves, and it was at 75% almost instantaneously. You improved pensioners' lives dramatically by that move, and that's never been done in history.

Giordano: Wow. [chuckles] Congratulations.

Barrett: Yes, it was really interesting. There's professional trustees over there that are really phenomenal, and I can't take credit for the idea, it was professional trustee. I got to watch that whole process and be a part of it. It's very interesting.

Giordano: Any key takeaways there as far as--

Barrett: I think the key takeaway there is you never give up the fight, right? These companies were down on their back and they were going to go through the bankruptcy process. It's in the dark of the night that say, "When things are really going bad, you learn what you're made of." You have to get up and fight, and these guys did. I think it's just never give up.

I think that takes me directly into one of the things that we've talked about in the past, which is what was one of the scary moments. 

Barrett: To me, it's a corollary of the Kodak deal. This happened at SBCERA, and that's back when Don Pierce is the current CIO there, James Perry was there, and Brian Long and myself. This was in '08, so it was in the depths of the crisis. We had about a billion-dollar portfolio of levered loans. We had these in separate accounts, and we used what's called TRS lines, total return slumps, to get leveraged to buy more loans, right?

Giordano: Right.

Barrett: It was about three times levered. We were making great returns until '08 happened. If you remember what happened to senior loans, senior loans almost always trade around par, 90 to 100, that range. In the GFC, everything went crazy, and senior loans traded down into the 60s.

Giordano: Oh, my God.

Barrett: If you have TRS lines with banks for leverage and their collateral goes from, "Hey, it looks really rosy at 90 to 100 down to 60," I can tell you what they did. They pulled the lines. You're sitting on this leverage, all your loans are tanked, you're three times levered, and you've got to sell out. You're going to be washed out.

I will tell you, this is the one time when I say it's the scariest time when I thought, "Barrett, car sales, that's a good second career for you," because that's where I thought I was going to be.

[laughter]

Barrett: I'm serious. I was like, "I better bone up on what the Cadillacs are today."

[laughter]

Barrett: It also correlates back to what I said before, where you have to dig in. When things are bad, you've got to look for solutions, and you don't quit looking for solutions till there's no hope. You've got to dig.

My team and I started calling all of our credit managers. We eventually found two credit managers that had open credit lines. We negotiate starting new hedge funds, basically, or new private levered funds with each one of these independent entities, utilizing their credit lines. We used our loans, negotiated some of our loans directly to them at a separate account, re-levered up, and bought more at a higher leverage rate. I believe the rate on that-- Those facilities at the time were like LIBOR plus 20 basis points. Basically, it was free leverage.

Then we re-levered at 60 cents on the dollar at a higher level than we sold out at. We ended up making the most amount of money ever made in SBCERA history on any trade. That, I'm talking about round trip, from the beginning to the end all the way back, taking into account the loss and the gain, that was the largest winning trade. We made billions of dollars off that trade.

Giordano: Oh, my gosh. [chuckles]

Barrett: When I say never give up, don't give up. There's always a solution. My team was a massive part of that. James Perry, Don Pierce, and Brian, everybody was involved. Because everybody thought we were going to be working at the car dealer next week.

Giordano: Going from the scariest moment of your career to the most lucrative.

Barrett: Yes.

Giordano: Set the scene for me as if it's a movie. Were you calling these creditors in the middle of the night? You're just rolling through what then was the Rolodex, trying to find whoever it was that was available. How many did you call?

Barrett: We only called our managers. It just so happened that two of our marriage managers and it was Aries and Stone Tower. Stone Tower, it was Mike Levitt's firm, was eventually bought by Apollo, I believe. Each one of those already managed money for us. It just so happened that they had those credit lines. If they didn't have those credit lines, I'm sure we would have kept calling more managers. We'd probably call Blackstone and everybody else but it just so happened that they had it.

I would say that whole process, we got an extension on our TRS form to hold us off. I think they gave us like, I believe, it was a 45-day notice to close. We did all of this stuff in 45 days, renegotiated with the other two firms, renegotiated on a loan-by-loan basis on what the pricing would be, cutting it over to them. I don't know that we got that great of a deal on the pricing because I think it was very clear that we were in distress. The managers, they got a pretty good deal. By partnering with them and using their leverage line, we were able to still come out on top on the trade. Yes, very stressful time period.

Giordano: That was the great financial crisis.

Barrett: Yes.

Giordano: Senior secured debt, obviously wasn't as secure as one would have thought. What are you careful of now? Senior secured debt, if I'm right, it's supposed to be the first thing that's paid off, right, as far as debt is concerned. [crosstalk]

Barrett: You're correct. [crosstalk]

Giordano: How did it go down to 60 on the dollar?

Barrett: The whole market went down that level. People were pricing in what I would call an Armageddon view like nothing was going to last. It's also, what you said is the exact reason why we had confidence to back it and re-lever it up. Two things were going to happen. Either every single company that is going under and no one's going to work and we're all going back to caveman, or these things are going to rebound at some point. How fast they rebound, I'm not real sure.

If everything else goes away, we own all these companies, we're the senior debts. That's the best place to invest for a sure return that's going to come back. You're not sure if all the equity is going to come back. You don't know if the MES will come back if they go to bankruptcy, but the senior debts, it's going to survive.

Giordano: Any senior debt that you decided to dump? Any sectors?

Barrett: Not at that time. We transferred every single loan regardless of whether the manager liked it, over to the new managers in their new funds. It was up to them to underwrite the credit and trade in or out of what they saw was best.

Giordano: What a story. [chuckles]

Barrett: Yes, it's pretty awesome.

Giordano: [chuckles] In a few minutes, let's get back into the Irish whiskey story. That's another fun one. Now you're at Texas Tech as Associate Vice Chancellor and CIO. You've been there since 2013. You've gotten autonomy for your staff, portable alpha, you've used derivatives, you've invested in venture capital, private credit, hedge funds. This is all new stuff from when you started there, correct?

Barrett: Yes, I would say that Tech had a decent portfolio. They had a little bit of private equity. They didn't use hedge funds as prolifically as we do in the credit space. They're more traditional hedge fund strategies in the portfolio at that time. I would say it's morphed a lot.

The portable alpha is probably the biggest one because that uses a lot of absolute return hedge funds as well as derivatives on top of it. The way we structure it is, it's really quite different. Traditional portable alpha, which a lot of people probably think is complex, but basically, you're just separating beta and alpha. Beta being the market return. For us, that's the ACWI I mentioned like 60% is benchmarked against ACWI. Our baseline is to buy an ACWI swap so we know we get that return. Then we invest because that doesn't cost money. We take the money and we used to invest it in hedge funds, about 80% of that money and 20% in cash.

That works pretty good until there's a really big market drawdown because the margin call on the equity swap is going to take all that 20% away if the market's down 20%. You need to have other forms of liquidity if you're going to run that type of levered program. What we did is we turned around said, "Yes, that's interesting but let's turn some of the hedge funds into swaps themselves and now we have a beta swap on top of a hedge fund swap, and all the cash behind it.

What that does this move you before when I mentioned you could have a 20% drawdown and recover, this new structure I can have a 50% drawdown and still not be taken out of the trade. What we did is we create a lot of cash flow behind both of those swaps to protect against margin calls. We would never get to 50 because we're pretty active trading the beta anyway. If we start seeing the market and the technicals all turn over, we're going to reduce exposure pretty rapidly. We're not worried about hitting the max drawdowns really ever.

Giordano: What else are you doing that's contrarian?

Barrett: Contrarian, I don't know that there is a ton of really contrarian stuff. The areas that we like right now are, honestly, a little more traditional. I would say we're at the bottom of the real estate cycle. From my perspective, people should be stepping on the gas with real estate. Now I'm not necessarily saying office because I know everybody goes to the office and said "Oh, the world's still a mess with office." Yes, it is still a mess with office.

Apartments in certain places don't look good. Nashville is completely overbuilt. They have so many apartments I wouldn't touch apartments there. Austin is a little overbuilt. There are areas you can find now to get into real estate that I think is really attractive especially with the rate environment getting ready to come down, so you'll capitalize on that.

I'd say the other place where everybody's run away from is oil and gas.

Giordano: I want to go back to what areas you're finding attractive in real estate.

Barrett: Real estate. Single-family home stuff is still really attractive to me. We're way underbuilt on single-family homes. Certain workforce housing areas are really interesting right now. I still like self-storage. I think it's an interesting asset class to have in your portfolio. Internationally, real estate also looks good over in Europe. We have a lot of exposure through Blackstone and other managers and get to see the deals that they're doing. It's quite attractive.`

I'd say the second strategy underneath that because we're talking about directly going out and building or buying real estate. The other place is the distress cycle. There is going to be a lot of hung loans on real estate and there already is. Those guys are running into walls. They're going to need refinanced out. You're going to be able to go in and pick up assets much cheaper I think, on the distress side as well. I would look for people that have really good workout experience that can attack that market.

Giordano: Nice. Anything you would avoid other than, let's say, office that you just mentioned?

Barrett: I think location is the ulBarrettate thing in real estate. There are certain geographies I don't really want to touch. I'm not very interested in New York City to be honest. I'm not very interested in Nashville because I think it's overbuilt. There are certain areas like that.

We know a little bit about that and we try to stay on tune in that as a staff like where should we be going. We learn most of that from our managers, our real estate guys because we're not doing real estate direct. We hire the manager like we'll talk to them about where the most attractive places are and we try to triangulate between the several managers that we talk to on a regular basis to see where there's overlap there. That's really how we ascertain our strategy in real estate.

Giordano: In Europe, what countries?

Barrett: We like the UK. We still like Germany, we have German assets. Even Spain is better and even some of the laws in Spain are better. Bankruptcy law used to be really terrible in Spain and they've dramatically improved that over the last couple of years. We're finding not only going into corporate investing, interesting there but as well as real estate, too. Doing loans, doing equity like you're better protected in Spain than you have been in the last 50 years.

Giordano: Makes sense and you were starting to talk about oil and gas.

Barrett: Oh that's right. Oil and gas is something we're looking at for this year actually. When I came here, we probably had almost 15-18% oil and gas in the portfolio. It was a massive oil and gas portfolio. We've run that down over time because I find oil and gas investments really hard. It's very cyclical industry. If you catch it right, you make a lot of money, but funds are 10 years long. I almost guarantee you're going to take a little bit of a ride during the fund life. We think now, especially because everybody is really focused on green energy, electric cars, and they probably should be, that's good for the environment, but oil and gas is not going away. We think the ESG movement has really pushed a lot of the capital out of that market, making opportunities much more attractive and a lot more opportunities for the managers that are left there in that space. We like midstream, we like downstream, we like all of it right now.

Giordano: Being in Texas, do you have a certain viewpoint as far as what looks most promising? There's a lot of talk of the infrastructure.

Barrett: Yes, I think some of the infrastructure is interesting. For instance, we're in a Greenfield project that's for a LNG project, and that one is getting contracts. We think that's a really interesting spot to be. Think of Cheniere Energy. Cheniere has made a ton of money in that space. Ours is Greenfield, they've signed a few contracts. I think they'll start to go live on production soon. That's been a great equity trade for us. We like the core of the basins, so Permian Basin, Eagle Ford. If you get in the core of those basins, I think that you'll make money, and the return on cash is great right now.

Giordano: Now, is it true that you made 109% returns in nine months on Irish whiskey?

Barrett: That's actually a true story. That's one of my favorite. It came from one of our managers in Fort Worth, and it was a co-investment deal. To tell you the truth, I almost fell out of my chair when I read it because I couldn't believe that. It was a credit manager that was pitching us a deal that they'd run across on Irish whiskey, and I was like, "Irish whiskey? I don't know that much about it." They got me up to speed. We read their decks and went through and had discussions with them and everybody, and it was really a distress trade.

The person that had the whiskey needed out of it, and then you just replace it back to a branding company that makes Irish whiskey. The whole round-trip trade only lasted nine months, which was really short, but to make 109% in nine months, we were quite proud. I will admit it was on not a large amount base of capital, but still, it was super exciting. That really led us into doing other deals. We did another deal with a firm in New York called Metropolitan, where Metropolitan built an A/B note structure based on bourbon. They're a credit manager, so the B was the branding company.

The equity was the branding company, and we were the debt structure in that. That strategy, I think it ran for about seven years-ish. That generated 40% IRRs over the seven-year period, and that was meaningful money. That was a regular full-size allocation for us. That was a phenomenal strategy as well. We're not too shy about doing things that are a little bit off the beaten path. We think there's a lot of value in that. I like reinsurance a lot right now. I think there's opportunity there. We'll look at these things, and if we find opportunity, we will jump on them.

Christine: You mentioned the reinsurance. What else are you looking at now that's fascinating to you, and why reinsurance? What's up in that market?

Barrett: Yes, I just think that if you get with a really good reinsurer, you just think of everybody is buying insurance for cybersecurity, so that's a whole monoline of reinsurance is cybersecurity itself for corporations. That's pretty lucrative. People don't get hit with cybercrimes every day. If you have a big diversified mix, it's a pretty nice revenue-generating business. When you mix that in with perils on casualty and different things, you get a completely uncorrelated portfolio to the stock market, which in the end, is the biggest driver of risk and return in the whole portfolio for any of us, whether you're a pension endowment or us.

Where that stock market goes drives your whole portfolio. It's what you're looking for with, whether it's Irish whiskey or bourbon trade or reinsurance, is you're looking for less correlation. I would say precious metals is another one that you could probably go into that would be a little less correlated. Reinsurance portfolio in that vein, I think you can get to that mid-teens return and have very little to low correlation.

Giordano: Back to the whiskey and the bourbon, they say those are recession-proof because people need them either way.

Barrett: Right.

Giordano: Is that true?

Barrett: I think need is an interesting way to phrase it. I'm not sure people need it. I do think that it's probably not on the same economic cycle as most assets. When things get really bad, people do tend to drink, which is probably not good, but they do. What the bourbon guys will tell you is, yes. Also, when times are good, everybody celebrates. Both Times they're drinking still. I think the interesting about the bourbon market is just that it's going more international now. The Japanese like bourbon. They're trying to push into China now. Europeans still buy bourbon.

Australians buy bourbon. Even in India, they export bourbon to India. Those markets, if the current bourbon production was to push out as much as I think the demand will happen internationally, there wouldn't be enough bourbon. I think it's a market that has plenty of growth potential in it and demand that will keep it going for quite some time. I do think the returns you get on barrels, say two years ago, is way too high. We've seen that come down over the last couple of years. Honestly, if you can make 15% to 20% returns with very little risk by holding bourbon and then sell it to an offtake agreement, that's a pretty interesting non-correlated trade.

Giordano: Well, it sounds. People are buzzing about the grid. What are your thoughts on the grid investments?

Barrett: We haven't really found a way to implement grid investments per se, directly. We don't have a specialty fund that that's what they focus on. There's a massive problem with the grid. I think everybody in America knows that. I don't know what the solution is, I don't know that anybody has found it. Your first impact on the grid is where are all the data centers going because data centers suck up tons of energy. You can't run those on lines just anywhere. Now they're starting to put data centers right next to power plants. I know one investment manager that's literally building add-on power plants next to the power plant just to run data centers.

That's a big push now. I think that anybody that's in the data center business probably knows that. It's an interesting strategy, but there's not that many spots you can do that. Everybody will rush out and do that. That will fill up very fast. They're going to have to come up with a way to transmit and store energy in a better, more efficient manner. To me, it has to almost come from some kind of battery-type technology, or you got to start building small-scale nuclear reactor plants. Think of the same ones that are used in nuclear submarines.

You never hear about them having a problem. It's because they don't. They're really small-scale nuclear plants that you could then plop down near cities or near data centers in cities to more efficiently fuel those areas. I think there needs to be radical transformation of not only our energy production but the grid itself, all those things.

Giordano: Brings into the whole equation of nuclear waste and the half-life.

Barrett: It does.

Giordano: Is there a way to actually dispose of it these days?

Barrett: I don't think that there's a way to completely dispose of nuclear waste perfectly from my perspective. I think the small-scale reactors get a lot closer with less than the old-scale 3-mile, island-type nuclear reactors of the old days. They have gotten better at it. There is no perfect answer to energy. It's not windy all the time. It's not sunny all the time. Petrochemicals, petro pushes off chemicals, and nuclear has waste.

Giordano: Barrels.

Barrett: I think it's called diversification that we're going to have to hope for in that area.

Giordano: Sure. Yes, and then there are the rare earths and all the debate.

Barrett: Right.

Giordano: Okay, let's move on to something more positive.

Barrett: All right.

Giordano: Can you tell me about the influence of some of your mentors on your career.

Barrett: Okay, yes. I think that's probably the best part of this industry, one of the best parts, is the people that you get to interact with are incredible. From your staff to people that mentor and help train you. If I were to go way back, there was a guy at a firm called First Quadrant named Rick Robertson, phenomenal guy back in the day. Obviously, he was trying to sell me a product at the time, but he took it upon himself and went way beyond that and started really teaching me about derivatives. Yes, I was a CFA, so I understood them, but not at a level Rick did.

Rick understood all the Greeks and trading options. He knew all of that stuff. He understood portable alpha, and in fact, he was the guy that really enlightened me about derivatives, and portable alpha, and overlays. He took me to see Marv Damsma at BP Amoco. For those of people that are listening to this that are older, they might remember Marv. He was one of the pioneers of portable alpha way back in the day.

Giordano: Wow.

Barrett: Kodak, as a matter of fact, and Weyerhaeuser are two other firms that use portable alpha. Rusty Olson at Kodak and Weyerhaeuser as well, way before anybody even called it portable alpha. They didn't have a name for it, it's just how they manage portfolios. Anyway, Rick took me to meet Marv Damsma, and in fact, Don Pierce, who I mentioned before, went with us on that trip to Chicago to BP Amoco. We sat down for a day and a half with those guys and learned how they ran portable alpha and studied how they did it. We didn't implement the same way they did, but it wasn't too far off.

Giordano: It's so technical, yes.

Barrett: Mentors like that change your life. They change the trajectory of your life and make you better. Another perfect example was my first boss at SBCERA, his name is Terry Slattery. Phenomenal first boss. Taught me a ton. I remember him telling me, "Barrett, I want you to sit with everybody in the office and learn their job, and make sure that you understand how to do it. If there's any problems with how they're doing things, I want you to fix the process."

Giordano: Wow.

Barrett: "All right, I want to just do investments."

Giordano: This was your first job out of college.

Barrett: He's like, "Yes, you will. Just go do this." There was no leeway whatsoever. I was like, "Man, he doesn't understand. I need to do investment." Anyway, fast forward, I went around, learned everybody's job. I even helped rebuild people's spreadsheets to calculate purchases of time in the pension fund, things like that. By the time I finished doing all that, I was a little slow at that time, but I realized what he had done, which is to teach me the pension system inside and out. At the time, I didn't recognize that. When you're in the face of doing it, you just want to do investments. In hindsight, he did me a big favor, which led me to become eventually the executive director and the CIO of that firm. I don't think I could have done that job without his mentoring and forcing me to learn the ins and outs of a pension system at that level.

Giordano: Incredible.

Barrett: I'd say that another person was Alan Martin. He was our consultant, my first consultant. A lot of the things that we talked about earlier where you eventually slowly get autonomy and things, it was his guidance and his helping to train me how to speak to a board, how to do pacing. I was young, I wanted to get everything now, like all young people do. Alan was really good about sitting me down as a young executive and saying, "Listen." He goes, "We take things in time and space. You have to do things in steps. You can't just go ask for all of it."

He really helped guide me and teach me, how do you work with a board, how do you communicate with them, and how do you take your Time and lay out a game plan for them to get to your end goal. That takes effort and it takes skill. He was phenomenal at that. I probably wouldn't be as successful today without those people.

Giordano: Incredible. You learned the pacing of the breakdown for a board presentation.

Barrett: Yes, you have to. Not only the pacing of the breakdown of the board presentation but the pacing of the presentations. Your first presentation is going to say, I want to do X. Your goal is to get all the way to Z. You're only going to talk about X in this presentation, later Y, later Z. You pace it out in segments so people don't get overwhelmed and see too much change at once.

Giordano: Can you break that down for me with an example?

Barrett: Yes. I would break it down this way. If you wanted to do portable alpha and you wanted to tell your board about it, the very first thing you do is you show them, today I'm going to talk to you about what the absolute return I can get from active managers is, how much can they beat the market by on average. If I structure as portal alpha, a derivative with a hedge fund in cash, what will my excess return be, and why will it be more consistent? You sell them on that idea first. If my goal all along was to implement portable alpha with a tactical overlay, I'm not going to talk about the tactical overlay out of the gate.

I just want to introduce portable alpha and get people comfortable that, hey, we're going to use derivatives to get exposure and we're going to structure it this way. If I get the yes on that, let's wait a year, run it, show that we're successful. Even though I know I'm going to do tactical later, or at least I'm going to pitch it, I wait and I paste that out a year from now so that I have a year track record, and I say, "See? It works. Now we're going to take Step 2." You don't talk about Step 2 before Step 1 is approved and before you have a track record in Step 1.

Giordano: What kind of track record?

Barrett: It's, you have to beat the index with your portable alpha structure on a much more consistent basis than the active managers do. Some boards will want you to have a-- Sometimes you can push it if you have a one-year track record doing that internally, you might be able to add something onto that afterwards. Sometimes it might take you two or three years to get the board comfortable. Once they're comfortable, then you take the next step. The pacing is all about your long-term vision of where you want to take the plan and what are those steps and taking it slowly, and getting approval each step of the way.

Giordano: Fantastic. Thank you.

Barrett: My pleasure.

Giordano: You built neural net frameworks for picking stocks when you were in grad school?

Barrett: Yes, I loved grad school. Undergrad, I got an undergrad, I really didn't know what I wanted to do. Like a lot of kids, I just went to grad school. In grad school, I met these guys that were running a thing called the Aztec Equity Fund. This is at San Diego State University in San Diego. These guys were, we raised money. I worked with them, and we raised money from investment managers, most of them in San Diego, as a challenge grant. If we would raise money from people we know, they would match it. We ended up having about a quarter-million-dollar portfolio.

We picked stocks. There was advisors from the graduate school of business that sat as our advisory board, but we built the whole program. We'd be responsible for certain sectors. The guy that founded the Aztec Equity Fund, Andrew Mark, who I think still works at GlobeFlex, him and I would, on weekends, go down and mess around with a neural network. He was the main architect on it, but we'd sit around and talk about that and say, "What factors do we want in our neural net?" Think of it as just looking at all the fundamental factors you can have of a corporation or a security, and then trying to program that in to run through all the data and look for the best stocks.

If you were targeting return on equity, which stock would be best? You'd want to see improving margins, you'd want to see improving return on equity, all these different factors. You just computerized it, basically.

Giordano: Wow.

Barrett: Yes, when other people were going out, we spent our weekends doing that. It was quite fun back in the day. Not near the pressure that investment managers have. Ours was challenge grant money and we were grad students, but it really gave you insight into the industry.

Giordano: Did it do well?

Barrett: It did pretty well. We beat the market index for the time I was there, for the two years, but not by as much as we'd hoped. We won, but barely.

Giordano: That was a heck of a lot of work...

Barrett: That was good, yes.

Giordano: It tuned you up in factors, factor investing.

Barrett: I think it helped me understand financial statement analysis, really, and what moves stock prices. There was a lot of focus on free cash flow, on earnings, et cetera, and disaggregating the drivers of earnings. It really cemented that CFA-level type stuff that people think about when they analyze a company.

Giordano: Makes sense. You have a special place in your heart for college kids, our recent grads, and you've had some really strong mentors yourself. Now you've built an internship program that offers great opportunities in the most promising candidates, something of a future. Can you talk about that?

Barrett: Yes. We ran an internship program up until COVID, then had to shut it down during COVID, and then reopened it again. It did okay pre-COVID. After COVID, it's really ramped up. We've got the business school much more involved now, and the deans to where they promote it a little more, so all the kids hear about it at Texas Tech University. Texas Tech is a system, so we have Angela State University, Midwestern State University, et cetera. All these kids from these universities hear about our internship program, can apply. I would say pre-COVID, we'd have, I don't know, a handful of people apply.

We had, I think, 60 interns apply for this last summer. We've had a massive increase in, word is out. We're super, super excited. We typically take in three interns. They work all summer. We're going to expand that to our operations side as well. Right now, this summer, we did all investment. Next summer, we're going to do investment and operations. It may grow to five. We give them the full run of the gamut. They have to do presentations. We have them analyze a private equity manager, and compare it to the private equity universes and categories, and do all the analysis, and do a write-up and presentation for the whole investment team. We also do that with hedge funds as well. We try to give them a little exposure to all the different asset classes while they're here.

We also built a program where they go fly to Boston and meet NEPC, our consultant. Our consultant walks them through and gives them what the view of the industry is and how it looks from the consultant's viewpoint. Who are their clients? How are their clients different? Then they walk them through the asset classes and research groups. The kids really leave with a really good, broad understanding of the market and a detailed understanding of, what does it mean to evaluate managers. We critique them on that. So far, the feedback from the kids has been fantastic. They love it.

We like this program so much that I went back to my CFO, who I report to, and said, "I think we need to take it one step further. Internships are great. They get to put something on the resume, but they're still young kids, and when they get out of here, it's still tough to get in this industry. What if we created a new position called Investment Associate, where I could offer an intern that graduates school a real job? That job is for three years. It's contract only. Each year, I'll reevaluate where you make the next year. That way, we can hire what was an intern, a fresh graduate, and give them three years of hardcore experience. He's here every single day, just like a regular employee. Gets a salary, benefits, the whole 9 yards."

We hired our very first Investment Associate this year that was an intern of ours. He graduated with his MBA, and it's worked out fantastic. He'll sit in a vertical that covers hedge funds right now for one year. Then the next year, he's going to do everything credit, both public and private. Then the next year, he'll do everything private equity and real assets. By the time he leaves, he'll spend a full year analyzing all these things and really should be able to get a job just about anywhere he wants on the allocator side.

Giordano: Fantastic. Wow.

Barrett: Yes. We should have three, and we'll hire a new Investment Associate each year. We're really excited about that.

Giordano: Wonderful thing. Hope it catches on.

Barrett: I think it is.

Giordano: Would you be open to people calling up and asking your advice on these things, especially within our allocator community?

Barrett: Yes, we're happy to talk to anybody about our internship program. Here in Texas, we've even gotten together with UBARRETTCO and TRS where there's an outing for everybody's interns to get together and network. I know that most of the places here, downtown Austin, all the big shops have huge intern programs. If you're somebody that's starting out and trying to build one, yes, absolutely call us. We're happy to dig in with you.

Giordano: Beautiful. Nice. Barrett, what would you like your legacy to be? You're a Hall of Famer or soon-to-be one.

Barrett: Always worry about legacy because I feel like it's like the time when everybody thinks you should retire when you start talking about your legacy.

Giordano: Let's say 10 years from now.

Barrett: I'm not quite ready yet. Legacy. I think I would want people to say, "Barrett was a really good investor, but importantly, a great boss. I think one of the things that I'm most proud of is how many guys and gals have become CIOs who worked for me. I think that's at over five or six now. It's knowing that I worked with all these different people, like the team that I have here at Texas Tech, and for me trying to mentor them and make them better, and then watching all of them succeed. Don Pierce and James Barry, great example. I think Don has probably exceeded me. He's that good. I think that the legacy would be, I was a great boss and mentor to other people and also a good investor.

Giordano: Beautiful. Thank you.

Barrett: Pleasure.

Giordano: This interview was so much fun. Tim Barrett, CIO and Vice Chancellor of Texas Tech University in Austin. Thank you. Thanks for your time today and all of your wisdom. Appreciate it.

Barrett: Pleasure.