UC Endowment, Pension Plan Post Healthy 2017 Returns

CIO warns of leaner days ahead.

The $11.4 billion University of California endowment had investment returns of 14.6% in the 2017 calendar year, while the university’s $66.6 billion pension plan produced returns of 16.7%, show statistics released Tuesday. However, university investment officials warned that 2018 may look a lot grimmer.

“These markets have run up far beyond what we thought they should,” UC Chief Investment Officer Jagdeep Singh Bachher told the Regents Subcommittee on Investments Tuesday. “If anything, if I can predict out, let’s hope there is no disaster to count off, maybe we have strong absolute numbers on a relative basis…maybe we’ll be likely flat or negative. For what it’s worth, we’ll try to manage risk going forward.”

Investment Subcommittee Chairman Richard Sherman told CIO that the university investment office is “navigating uncertain markets.”

“Expectations going forward are much lower,” he said. “We experienced great public markets obviously the last 10 years since 2009.”

Bachher said at the meeting that he wants the investment office to potentially use its cash position to buy some “good defensive assets” before the end of the university fiscal year on June 30.

The UC endowment has a $1.1 billion cash position, while the pension plan has $5 billion in cash.

UC investment officials Tuesday cited one possible area of expansion: building up real assets, including real estate.

The UC endowment has traditionally lagged other major university endowments in private markets.

UC statistics show that real asset investments make up only around $700 million of the $11.4 billion endowment. The pension plan also has a relatively small real estate portfolio, just under $4 billion.

In another major initiative, Bachher told the investment subcommittee that his office continues to reduce the number of external investments managers.

He said when he took the role in April 2014, there were 340 outside managers. Now the number is around 120, and the ultimate goal is the reduction of another approximately 20 managers.

“I would like it to be around 100,” he said. “It keeps our life simple. Less is more is important, but keeping it simple is really important, too. That is where the bulk of the work is left.”

Bachher did not offer a timetable for the additional reductions. He said the reductions have saved the university around $300 million, which could increase to as much as $500 million when additional managers are terminated.

Sherman said fewer managers have given the university more negotiating power to obtain fee reductions.

Many of the manager reductions have occurred in the equities asset class and are part of a program to manage more equity strategies in-house.

Scott Chan, a senior management director at the UC Investment office, told the investment subcommittee Tuesday that the number of outside equity managers for the UC endowment had dropped to 13 currently from 42 when Bachher took over in 2014.

Chan told CIO that most of the 13 managers specialize in equity strategies that invest outside the US, where specialized investment expertise can still make a difference in producing excess returns.

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