It is now 10 years since the UC
Regents ousted their
Treasurer, Patricia A, Small, and brought in a new era of investment
strategy
that featured outsourcing much of the management of the pension and
endowment
funds.This is a suitable time to
try to evaluate their success or failure. Here is a bit of that.
One ongoing controversy is the request from the state
Legislature that
The Regents allow "shared governance" with employees over management
of their pension fund - the University of California Retirement Plan
(UCRP).This is presently the
subject of intense negotiation with employee unions; and there is a
letter from
UC President Mark Yudof in which he claims that the fund has been well
managed
and therefore the Regents' critics are wrong. That will be the focal
point for
this review.
President
Yudof's
Views
on
UCRP
Here is the relevant paragraph from Yudof's July 8, 2010, letter
addressed to LaKesha Harrison, President of AFSCME Local 3299,
representing the
UC Union Coalition.
"There can be no argument, however,
that the Plan
enjoyed strong performance during this time.Over
the
past
20
years,
the
assumed
return
was 7.5
percent.Yet UCRP achieved actual
returns of 8.9 percent.Relative
to its policy benchmarks, UCRP performance in the past decade actually
outpaced
those of the prior two decades.For
the decade ended June 30, 2009, UCRP's total return exceeded that of
the
benchmark by 30 percent, whereas for the previous decade the return
exceeded
benchmarks by only 4 percent. And while I agree that the treasurer
achieved
impressive overall performance through 2000, it must be considered in
the
context of unusually favorable capital markets."
In Table 1, below, I have assembled official data about UCRP
investment
performance over the past two decades.These are 10 Year Annualized Total Returns: that means average
return on
investment looking back over the past ten years at each fiscal year end
-
sometimes this is called a "rolling" or "trailing" average.
These numbers come from the annual reports of the UC Office of the
Treasurer
(UCOT).
* These are 5-Year and 20- or 21-Year data
** Ten Year data as of March 31, 2010 (The 6/30/10
results have not yet been published)
What we see in Table 1 above is that over the decade 1990-2000,
UCRP had
an average annual return on investments of over 15% and over the decade
2000-2010 the average annual return on investments was at most 3%.
Those two
numbers are very much in contrast. Yet, President Yudof merely averages
them
and claims that the overall 20-year return of 8.9% shows that the fund
has been
well managed.That is quite
disingenuous in light of the widely recognized controversy over the
Regents'
ouster of their Treasurer, Patricia Small, in 2000 and their making
major
changes in investment strategy for the subsequent decade.
Next, Yudof turns to talk about benchmarks.The Treasurer's annual reports gives this data (shown in
Table 2) for UCRP returns and benchmarks, averaged over the ten year
periods
ending at the indicated dates:
Table 2. UCRP 10-year annualized
returns compared to
Benchmarks
Date
UCRP
Return
Benchmark
Difference
June 30, 2009
2.30%
1.77%
+ 0.53%
June 30, 2001
13.9%
13.3%
+ 0.6%
The 2009 data shows that UCRP performance beat the benchmark by
0.53%
and Yudof sees this as 30% of the benchmark (1.77%), while in 2001 the
difference is just about the same, 0.6%, but he notes this is only
about 4% of
the benchmark for that year (13.3%).This is complete nonsense.
No respectable financial analyst would do
what Yudof has done here - divide the above-benchmark performance by
the
benchmark itself. Let me explain that. Suppose it was a bad year for
the
markets and the benchmark performance came out zero; if you achieved
performance any tiny bit better than the benchmark, this ratio would be
infinity percent! (In really bad years the benchmark performance will
be a
negative number.) The only sensible way to look at this data is to
focus on the
differences themselves; and here we see that the two decades show
nearly
identical results.(If we look at
the most recently published data from the Treasurer's Office, dated
March 31,
2010, then we find that the 10-year comparison between UCRP performance
and the
policy benchmark has dropped to a difference of only + 0.08%, which is
much
smaller than the number he used, +0.53%.)
You might ask why I chose the year 2001 in the above comparison
rather
than 2000 or 1999. The answer is that 2001 is the earliest year in
which one
finds any data about the "policy benchmark" in the Treasurer's annual
reports. Previously, they did not use any "policy benchmark" but
rather compared UCRP investment performance to the average performance
of a
large peer group. The positive differences seen in those earlier
reports were
considerably larger than the numbers shown here.One
can
argue
about
which
is
a
better
comparison -
benchmarks or peer groups - but what Yudof has done here is really bad
data
manipulation. In fact, the so called "policy benchmark" reported in
2001 as a "Historical" benchmark is a fiction, manufactured
after-the-fact by The Regents and their advisors at that time.
Finally, Yudof tries to dismiss the outstanding investment
performance
of UCRP (under Treasurer Small) before 2000 by referring to the
favorable
market performance of that decade. The real facts become clear when one
looks
at UCRP performance compared to other comparable investment funds.
While almost
everyone did very well in the decade 1990-2000, UCRP's record was far
ahead of
their peers. This was acknowledged very candidly in the report from
Wilshire
Associates, which the Regents adopted as their new investment policy in
March
2000. I have gathered and published further data showing this record of
extraordinary accomplishment in this series of papers, "What's
Happening
with the Pension Fund?"
I have previously published some data on such peer comparisons
for the
more recent decade; and there one saw that UCRP performance had slipped
quite
badly. More of this data is assembled below. Recently, the current
Treasurer of
The Regents has published a paper denigrating the use of peer
comparisons.My own view is that it is
best to
provide a variety of performance measures; each one may show a
different aspect
to be considered by fiduciaries and beneficiaries of the pension fund.
I favor
more light, not less, and if people want to debate the relative value
of
different measures, that is healthy. I do, however, condemn the cherry
picking
and distortions employed by President Yudof.
Some
Comparative Data on Investment Performance
Data from TUCS (Trust
Universe Comparison Service)
acquired from UCOT
The numbers in these tables show the percentile ranking
of UCRP performance for each peer group for the indicated time period
(looking
backward from the stated date).
Top Quartile is 25th percentile or lower; Median is 50th
percentile; Lowest Quartile is 75 or more.
UCRP Percentiles as of 6/30/04(43% above
the median; 7% in lowest quartile)
Peer Group
1 year
2 years
3 years
4 years
5 years
7 years
10 years
All MasterTrusts
65
41
74
69
62
43
9
All Trusts > $1 B
Public Funds
60
33
79
67
57
35
3
Public > $1 B
UCRP Percentiles as of 6/30/05(38% above
the median; 10% in lowest quartile)
Peer Group
1 year
2 years
3 years
4 years
5 years
7 years
10 years
All MasterTrusts
39
58
40
68
67
59
17
All Trusts > $1 B
53
69
48
78
72
64
16
Public Funds
30
54
29
76
64
50
2
Public > $1 B
UCRP Percentiles as of 6/30/06(20% above
the median; 24% in lowest quartile)
Peer Group
1 year
2 years
3 years
4 years
5 years
7 years
10 years
All MasterTrusts
72
54
56
48
69
59
28
All Trusts > $1 B
88
79
77
71
86
72
37
Public Funds
73
58
59
54
76
61
18
Public > $1 B
UCRP Percentiles as of 12/31/07(62% above
the median; 5% in lowest quartile)
Peer Group
1 year
2 years
3 years
4 years
5 years
7 years
10 years
All MasterTrusts
27
31
42
39
41
67
45
All Trusts > $1 B
40
53
64
65
67
82
65
Public Funds
20
27
36
38
42
70
39
Public > $1 B
UCRP Percentiles as of 12/31/08(0% above
the median; 70% in lowest quartile)
Peer Group
1 year
2 years
3 years
4 years
5 years
7 years
10 years
All MasterTrusts
77
71
69
72
68
76
65
All Trusts > $1 B
80
75
81
83
84
92
75
Public Funds
84
83
75
77
77
84
66
Public > $1 B
84
78
86
87
89
93
70
Note:In this
data collection one sees top quartile performance for UCRP seven times
- six of
those in the 10-year boxes in 2004 - 2006 and one in a 1-year box in
2007.
The overall picture from this
data is that there was much
better performance, relative to peers, in the earlier years than there
has been
in the last decade. These tables cover the earliest and the
latest data I have.One can ask UCOT for
the more recent
TUCS data.
In the past I have made repeated requests that the Treasurer
publish
these data routinely, along with other data showing the performance of
individual external investment managers, and also data showing fees
paid to
external investment managers and consultants - all to no avail. That
experience
contradicts President Yudof's claim, found in the abovementioned
letter:
"As a public institution, the University is committed to transparent
and
open governance of the assets for which it is responsible."