Performance Reports for UC's External Investment Managers

by Charles Schwartz, UC Berkeley           August 23, 2006
posted at

Data as of 12/31/05
Data as of 3/31/06
Data as of 6/30/06

Explanations of the Data

These data are prepared quarterly by UC's Custodian Bank (State Street Corporation of Boston, MA) and they have been provided to this author by the Office of the Treasurer of The Regents (UCOT) in response to requests filed under the California Public Records Act.

The reports list the Total Return (%) on investments achieved, over various time intervals, by each of the several dozen external firms that UC has engaged to manage investment of its retirement funds (UCRP) and endowment funds (GEP).  The assets are grouped into the following asset classes.

TABLE 1.  UC Assets under Active External Management (6/30/06)
Asset Class
Market Value
U.S. Equity - Large Capitalization
$8,743 Million
U.S. Equity - Small Capitalization
$1,200 Million
Non-U.S. Equity - Developed Markets
$3,062 Million
Non-U.S. Equity - Emerging Markets
$1,236 Million
In addition, each class is subdivided by investment style: Core, Growth or Value.

Immediately following each external manager's line of performance data is a second line (with a code symbol starting with the letter X) that gives comparison data for the performance Benchmark assigned to that manager.

Scanning the 6/30/06 report for performance over the last 1 year period, one counts 18 external managers who performed better than their benchmarks and 22 who performed worse than their benchmarks for the UCRP portion; the same counts are 20 and 21 for the GEP portion.

Looking at the aggregate performance of all external managers, over that latest 1 year period, compared to their assigned benchmarks, one sees significant underperformance in every asset class:

TABLE 2.  Performance of All External Investment Managers (latest 1 Year period)
Asset Class
Total Return
U.S. Large Cap
   8.72 %
  9.08 %
U.S. Small Cap
 11.84 %
 13.53 % or 14.58 %
Non-U.S. Developed
 25.46 %
 26.89 %
Non-U.S. Emerging (UCRP)
 31.33 %
 35.47 %
Non-U.S. Emerging (GEP)
 34.83 %
 35.47 %

This means that if those assets had been placed with index funds, instead of those external investment managers, UC would have earned about $150 Million more over the last year.

The full names and locations of the external investment managers are listed on the accompanying file provided by UCOT.  (In addition, GMO stands for "Grantham, Mayo, Van Otterloo & Co." and CGI stands for "Capital Guardian Trust Company.")

The following are abbreviationa and notes useful for reading these reports:
EMV = Ending Market Value (in $)
FYTD = Fiscal Year to Date
CYTD = Calendar Year to Date
ITD - Inception to Date
For periods greater than 1 Year, the data are the Annualized Total Return (%).

In addition to these actively managed external investments, there are also passive investments in externally managed index funds; and there are also Fixed Income investments actively managed internally.  UCOT publishes an annual portfolio of all its investments, which may be found as "Holdings", separately under Retirement Investment Funds and Endowment Funds, on their website .

Here are the total holdings of UCRP from UCOT quarterly reports as of 12/31/05 and 6/30/06.

TABLE 3.  Total Investments of UCRP ($ Millions)

U.S. Equity Index Fund
Non-U.S. Equity Index Fund
Actively Managed Equities (detailed above)
Fixed Income (Bonds, internally managed)
Alternative Assets (Private Equity* & Real Estate)
Liquidity Portfolio
Total Market Value

In a (secret) meeting last November, the Regents decided on another major shift in assets for UCRP, reducing their U.S. portfolio of stocks and bonds and putting about $8.3 Billion more into Non-U.S. holdings.  These shifts are partially apparent in the data of Table 3.

*Following a previous lawsuit and subsequent legislation, UCOT now publishes detailed reports on its Private Equity investments, showing even more information than we have been able to obtain about its public equity investments.

Some Background and History

Why am I publishing this data?  Why isn't UC doing this itself?

Each quarter, the UCOT makes a detailed report on its investment activities to the Regents' Committee on Investments, and those can be seen on the UCOT website.  The data there are highly aggregated; and much that would be of interest to inquiring members of the public (or members of the UC community who are supposed to be beneficiaries of those investment activities) is hidden from view.

For some time I have made repeated requests to UCOT and to the Regents that they ought to, routinely, publish detailed performance data for each of their external investment managers.  I pointed out that other large public pension funds in this state - CalPERS and CalSTRS - do this routinely; and those organizations also publish an annual listing of all fees paid to each external investment manager and adviser, as well as all commissions paid to every investment firm they or their managers interact with.  UC officials have never given me any answers as to why they choose not to do this. (My own guess is that this is a directive that comes down from regents rather than some failing on the part of the professional staff of UCOT.)

Another inquiry I have made concerns the overall performance of UCRP investments as compared to other large pension funds.  I have so far been unsuccessful in getting such comparative data from UCOT.  This is a standard analytic method used by outside investment consultants, and it used to be done also by the internal staff.  In my previous publications (see "What's Happening with the Pension Fund? - Part 22") I have found such data on a nationwide scale and it showed that, over the decade of the 1990's, UCRP achieved a funded status (ratio of assets to liabilities) that placed it way above any other public pension fund.  I do not have the resources for such a broad based study, but I have simply collected some recent investment performance data for California's three top public pension funds, as follows.

TABLE 4.  Total 1 Year Return on Investments of California Retirement Plans
Pension Fund
 16.6 %
 12.3 %
 12.26 %
 17.38 %
 11.09 %
 13.2 %
UC Regents
 14.34 %
 10.30 %
  7.10 %

That gap in last year's returns is surprisingly large: 7% compared to 12% or 13%. This translates to a "loss" of income for UCRP amounting to over $2 Billion.  I wonder who will have to pay for that shortfall.  UC officials will probably want to respond to this data with in-depth explanations.  Of course, I look forward to such dialogue.

The overall path down which the Regents have been taking the UC Pension Fund in recent years is unmistakably the path toward privatization (outsourcing) of the investment management activity.  Until the year 2000, almost all of the UCRP investment activity was done internally, by the staff of the Office of the Treasurer.  Then, following the (secret) adoption of Wilshire Associates' new investment strategy, some $8 Billion in stockholdings was shifted out into an externally managed index fund.  Next, in late 2002 (in another secret meeting) the Regents, again under Wilshire's advice, fired the entire equity staff in UCOT and moved another $15 Billion outside for eventual funding to external investment managers.  At that time, the fixed income investments were left in the hands of the internal staff, which had an impressive record of outstanding performance.  With their latest (secret) changes, last November, the Regents took a big bite out of the fixed income portfolio in shifting another $8 Billion to offshore investments.

In many of my earlier papers ("What's Happening with the Pension Fund?") I questioned the objectivity of the rationale for those earlier moves, citing biased use of performance data used to make their case. The usual argument in favor of "privatization" in any sphere of governmental activity is the claim that the private sector is more efficient.  The new data presented here allows us to start making a judgment of how well that has worked out for UCRP.  It doesn't look good.