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University of California endowment revamps asset allocation in turn to more private assets

UC Chief Investment Officer Jagdeep Singh Bachher isn’t confident that the endowment can continue to match the outsized returns it has achieved.

The $10.6 billion University of California endowment is embarking on a major asset allocation restructure that will cut the amount invested in equities by a third and put a new emphasis on private market investments, adding more dollars into private equity, absolute-return strategies and real assets.

The new asset allocation for the Oakland-based endowment cuts equities to 30% from 45% of the endowment, shows a webcast of the UC Regents investment subcommittee on July 11. Private equity increases to 22.5% from 11.2% and absolute-return strategies increase to 25% from 18%.

Real Assets is also up, to 12.5% from 2% of the portfolio and fixed incomes drops to 10% from 10.7%. A 4% allocation to real estate is now part of the real assets allocation. An 8.5% cash allocation was also eliminated.

UC investment officials say the new allocation is part of a plan for the endowment to put more of an emphasis on illiquid assets, with the aim to maintain stronger returns in the future in what is expected to be a lower-return environment.

The restructure also puts the endowment more in line with the asset allocation of other major endowments, which have maintained much larger private market allocations.

UC Chief Investment Officer Jagdeep Singh Bachher said at the meeting that while the strength of the equity markets led the UC endowment, pension plan and other investment pools to an approximate 13% to 14% of return in the fiscal year ended June 30, he isn't so confident of the future.

"Looking at where we came from, and where we are today, it's hard to imagine that we can have a good year like this next year in a low-growth environment," he said.

"What goes up must come down at some point," Mr. Bachher went on.

Edmond Fong, who Mr. Bachher announced at the meeting had been named to lead the endowment's investments, said there was no timetable set for implementing the allocation changes. Mr. Fong had been managing director, hedge funds and strategic opportunities.

Instead, he said investment will proceed on an "opportunistic" basis, restructuring the portfolio as the best investment opportunities become available instead of being done in a "linear" fashion.

Mr. Bachher said the endowment portfolio had already seen some restructuring, including a reduction in the number of external managers in the last three years to 85 from 200 to 250.

Mr. Fong said much of the restructuring so far has been moving away to higher-conviction equity managers from equity index strategies.

Mr. Bachher also announced the combined assets of the endowment, pension plan and other investment pools total around $110 billion as of June 30, up about $13 billion from the end of the previous fiscal year.