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University of California endowment doubles private equity in new asset allocation

University of California Board of Regents' investment subcommittee approved on Tuesday changes to the long-term target asset allocation of its $10.3 billion endowment, which included a significant increase to private equity and reduction to public equity.

The new targets are 25% absolute return (vs. 23% previously), 22.5% private equity (vs. 11.5%), 15.7% public equity (21%), 11% non-U.S. equity (14%) and 3.3% emerging markets equity (7.5%).

Additionally, real assets and real estate will be consolidated into a single portfolio called real assets, with an overall target of 12.5% vs. real estate and real assets' previous individual targets of 7.5% and 3%, respectively.

Fixed income/liquidity will also be consolidated into a single portfolio called liquidity with an overall target of 10%, compared to the portfolio's previous target of 12.5%.

One of the primary reasons provided for the raised private equity target was to take advantage of the asset class' illiquidity premium, according to a webcast of Tuesday's meeting.

During the meeting, Samuel Kunz, managing director, asset allocation and investment strategy at the University of California, described the endowment's existing private equity and public equity allocations as closer to that of a pension fund than an endowment.

How the existing manager lineup will be affected by the new asset allocation was not discussed at the meeting.

For the 12 months ended Feb. 28, the endowment returned a net 14.6%, surpassing its policy benchmark of 13.55%. Longer term, for the three, five, 10 and 20 years ended Feb. 28, the endowment return an annualized 6.5%, 8.35% 5.62% and 7.54%, respectively, above it benchmark returns of 4.6%, 6.63%, 4.89% and 7.01% in each of those periods.

For the fiscal year ended June 30, the endowment returned -3.4%, 1.7 percentage points below its benchmark.