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UC Regents Delivers Mixed Investment Results During the Pandemic

The University of California’s largest pool of capital returned 1.7 percent for its most recent fiscal year, underperforming its benchmark.

A pandemic, excess cash on hand, and market turmoil left the University of California’s investment office with mixed performance in its latest fiscal year.  

The investment office recently published a report detailing its performance and internal initiatives for the fiscal year ending June 30, 2020. The report shows that the university’s largest pool of capital, its pension fund, underperformed benchmarks, returning less than 2 percent for the fiscal year. Meanwhile, its endowment portfolio outperformed, returning 5 percent for the year. 

“At the start of the fiscal year, we were cruising along, enjoying the 11th year of a bull market — the longest in history — and fully expecting it would last through 2020,” chief investment officer Jagdeep Bachher wrote in the report. “The novel coronavirus, however, had more nefarious plans.” 

When the pandemic began, UC Regents was holding a “fairly significant” amount of cash compared to its overall allocation, “because the equity rally before the pandemic had run long and far,” Richard Sherman, one of UC Regents’ board members, said in the report.  

The investment office maintained its cash position at the beginning of the pandemic, until a month or so in when it began to put that capital to work. Sherman added that in hindsight, the university may have held more cash than “would have been opportunistic” coming out of March’s market lows.   

The investment office manages several pools of capital on behalf of the school system. In total, it manages $130 billion in assets, the report said.   

The largest pool of capital — UC’s pension — has a total of $70.2 billion invested. Over the one-year period, that pool of capital returned 1.7 percent, underperforming its benchmark, which returned 3.1 percent. However, over the ten-year period, the pension outperformed its benchmark by 40 basis points, returning 8.2 percent.  

Over the one-year period ending June 30, 2020, UC’s endowment portfolio, which is its second-largest pool of capital with $14 billion under management, returned 5 percent, beating its benchmark by 2 percentage points. Over the ten-year period, that pool of capital returned 8.8 percent, beating its benchmark by 1.6 percent.   

Meanwhile, UC’s total return investment pool, defined in the report as a “working capital portfolio with an asset and risk allocation geared to an intermediate-term horizon,” underperformed its benchmark over the one-, three-, five-, and ten-year period. The portfolio is worth $7.4 billion.

[II Deep Dive: The University of California’s Investment Chief Said It’s ‘Fossil Free.’ So Why Does It Own Oil Companies?

According to the report, in the six years since Bachher joined the investment office, the number of investment partnerships has decreased significantly, from 280 in 2014 to 50 in 2020.   

The report said that UC Regents believes that “by limiting the number of investments in our portfolios, we believe we can reduce risk and increase returns.”  

It also says that the investment office has cut costs, including saving $1 billion in fees over the last six years.

The report is something of an anomaly as far as annual endowment publications go. For one thing, its design is slick, resembling a magazine with its modern typefaces and full-page portraits of board members and executives. It also includes essays and question-and-answer sections with investment office heads, board members, and UC’s investment managers.   

A number of the perspectives included in the report highlighted that the investment office went “fossil-free” in 2020. As of October, however, UC still held several fossil fuel investments, as Institutional Investor previously reported.

“The bottom line is we sold off $1 billion of fossil fuel assets,” chief operating officer Arthur Guimaraes said in the report.

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