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WEDNESDAY, MAY 2, 1979
By LIZ NEWLIN
Battalion Staff
The Permanent University Fund
invested its first million in 1949-50,
and since then its growth has been
steadily upward.
The first billion-dollar investment
year ended last Sept. 1, with a total of
$1,043,320,989.93, according to the
annual investment report.
The PUF is earning more than
6.75 percent yearly, says W.L.
Lobb, who is executive director of
the Office of Investments, Land and
Trusts for the UT System, the man
ager of the fund. He says the invest
ment philosophy is basically con
servative.
It s probably as conservative as a
university will be,” he explains, “be
cause of a large amount of U. S. gov
ernment bonds in the portfolio.” At
least 23 percent of the fund must be
put in U.S. bonds to guarantee the
construction bonds that are issued by
the Systems against the PUF. Most
university funds have this kind of
protective regulation, Lobb says.
One advantage of the guarantee is
that the bonds then earn the highest
rating given — the triple-A.
The fund trades security for high
yield, says Dr. Clinton Phillips, act
ing dean of the College of Business
Administration here.
“It’s pretty good (return) for a safe
fund, and it is safe,” he says.
Lately the percentage in govern
ment bonds has been inching up
ward in anticipation of a bill now in
the Legislature that would allow the
Systems to issue bonds against a full
30 percent of the fund, instead of the
current 20 percent. Texas A&M’s
share of the bonds would increase
from 6 to 10 percent of the value of
the fund.
This is the third time the change
has been considered, Lobb says.
"It’s been talked about for years.”
Only now, however, the PUF is
close to being able to cover the
additional bonds with government
securities.
Regardless of any possible change,
the majority of the fund will still be
invested in non-government securi
ties.
Lobb says that because of current
stock market conditions, more
money than usual is in short-term
securities. These stocks and bonds
are now earning about 10 percent
interest, much higher than their re
turn of three years ago, 5 percent.
“There’s been a weakening in
(long-term) bond and stock prices,”
Lobb says.
About 36 percent of the fund is in
common stocks, and the balance is in
government and corporate bonds.
All investment of the fund is hand
led in Lobb’s office. An investment
advisory committee — made up of
leading financial people in the state,
mostly bankers and insurance men
— makes recommendations. So does
Duff and Phelps Inc., an investment
firm in Chicago.
But the final decision rests with
Lobb and his staff. It is delegated to
them by the regents of the UT Sys
tem, who by law are charged with
management of the fund.
Freeman, Texas A&M’s chief
executive officer, attends quarterly
meetings of the committee, but little
more.
Apparently the office has been
doing pretty well. The rate of return
is the highest ever, and most of the
incomes that build the fund — oil,
gas and water royalties — are ex
pected to grow significantly. Right
now, Lobb says, the rate of return is
between 6.95 and 7 percent. Last
year the return was about 6.5 per
cent. Returns didn’t reach about 5
percent until 1972-73. It hit a low in
1949-50 at 2.51 percent and has risen
steadily since then.
The method of investment — all
in-house — is virtually the same
Harvard is using now, according to
Esquire magazine. Yale, on the
other hand, farms out its endowment
to several investment firms and has
not performed as well lately.
Lobb’s predictions for the future
are also optimistic. In the PUF bond
statement, his office predicts that the
total invested will rise from $1.04
billion in fiscal year ’78 to $1.4 billion
in five years. For 1988, the predicted
total is $1.7 billion.
And Lobb says his projections are
always conservative.
“We always try to be on the con
servative side rather than the liberal
side,” he concedes. The office is re
vising projections — upward — for
this year’s bond statement now.
Further, one of the main plugs in
his formula is another conservative
estimate — the projected royalties
from oil and natural gas leases. The
University does not produce any of
its own oil. Leases are granted to the
highest bidder, who pays the PUF
royalties from his production.
James B. Zimmerman, manager of
University Lands, oil, gas and min
eral interests, says his estimate of
royalties is low. From his office in
Midland, Zimmerman says, “I feel
like we ll really do better than that
(the projected royalties).
“I didn’t want to tell the invest
ment people that we’d make $80 mil
lion and then not quite have it.”
And the royalties may be even
higher if oil price controls are re
moved, as President Jimmy Carter
would like.
“When they take off the controls
it’ll help the state universities,” the
geologist says. In oil royalties, the
PUF will gain $20-25 million per
year, he says.
He said the estimates didn’t an
ticipate the decontrol of oil prices.
Since 1973-74, the royalties from
oil and gas have been tied to the
market price — thanks to a lawsuit
and an attorney general’s opinion.
Before that, Lobb explains, the roy
alty was negotiated when the min
eral rights were first leased.
“That made a big difference in the
income,” Lobb recalls. Indeed, from
fiscal year ’73 to FY ’74, royalties
jumped from $18.9 million to $31.5
million (see chart). Also about that
time the Arabs embargoed oil, push
ing prices — and PUF royalties —
even higher.
One other boon, Lobb says, was
the discovery of deep natural gas in
1968-69 that started producing in the
70s. If the gas and few sulphur wells
centered in Ward County were pro
ducing at 100 percent of capacity, the
royalties would be about $6,500 a
day.
Currently they are producing at
about 60 percent because of a glut of
natural gas on the market, Zimmer
man says. The oil wells have been
producing at 100 percent since the
early ’70s.
Some 1,700 separate leases on the
lands have about 5,300 producing
wells, the geologist reports.
University lands in Andrews
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County produce the most oil. Those
in Ward and Windier counties pro
duce the most natural gas. The
geologist also lists Crockett, Regan,
Upton and Pecos counties as big
producers. Only two of the 19 coun
ties included in University lands do
not have producing wells — and
they’re near El Paso, 200 miles from
oil country.
Water, is also found in most of the
counties. And Zimmerman says rev
enues from water contracts should
also be increasing soon. Some of the
first contract for water were
negotiated in the 1960s, with a cost-
of-living clause. In 1964, for exam
ple, just over $120,000 was collected
for water royalties and rentals. Ten
years later, the contracts were re
negotiated, and that figure leaped to
about $296,000.
Cities have first claim on drinkable
water discovered, and Andrews and
Peyote get all their water from wells
on University lands; Odessa, Mid
land and Crane get partial supplies
from the wells.
Another session of contract re
negotiation approaches. Zimmer
man predicts that will more than
double the royalties, which would
put them in the neighborhood of
$600,000 a year. All this money goes
into the PUF, to be invested for fur
ther profits.
One income does not go into the
PUF to be split between Texas A&M
and UT.
That’s the money collected from
grazing leases on the 2.1 million
acres, which goes to UT alone. In
1978 the income was about $1.52
million. Billy Carr, manager of the
lands “from the ground up,” says
much of the land has been held by
the same families for generations.
He plans to institute “flexible graz
ing leases” within five years.
Another clause would be written
into the 10-year contracts that the
133 ranches hold to use the land.
Charges for the land would be fig
ured according to the cattle market
and the number of cattle the land can
support. Now lessees are charged a
flat rate ranging from 28 cents per
acre to $1,251 per acre. The flexible
leases, Carr says, would let the ren
tals keep up with inflation.
They would also triple the income
from the grazing leases, he predicts,
to $4.5 million a year.
Now, about $300,000 a year from
the rent money is used to pay for
experiments on the land — con
ducted by the Soil Conservation
Service and the Texas A&M Agricul
tural Experiment Station.
Carr estimates about 80 percent of
the programs are with the TAES. So
even then the Texas A&M System
gets part of the action.
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