More co-investments, passive and quant strategies set for pension fund, endowment
Since he was hired four years ago, University of California's Chief Investment Officer Jagdeep Singh Bachher has been giving the $66.6 billion pension fund and $11.5 billion endowment a makeover — and he's not done yet.
Mr. Bachher calls the approach the "UC Investments Way." What remains to be seen is whether the new strategy, including seeding five new investment funds, will produce good risk-adjusted returns in what has been a low-growth environment.
Mr. Bachher and his investment staff plan to continue beefing up the pension fund and endowment's public equity portfolios' passive strategies, add a quantitative strategy and, possibly, market-neutral holdings.
The investment staff also plans to increase the size of co-investments, particularly in private equity and real estate, and steer the portfolios away from fossil fuel exposure, aiming for a carbon-neutral real asset portfolio by reducing oil and gas assets and increasing infrastructure investment.
Staff members also plan to increase the average commitment size to real estate and real asset managers.
Staff members are in the midst of a transaction that would increase the real estate and real asset portfolios dramatically. They also are about to announce a new direct venture capital investment based on a University of California professor's innovation, Mr. Bachher said in an interview. He would not elaborate.
"We are at the first stages of what we are doing here," said Mr. Bachher. "It will take another decade or so" to judge the success of the changes.
During a March 13 meeting of the UC Regents investment subcommittee, Mr. Bachher emphasized the growth in total assets in the four years since he joined. The investment office managed a total of $118 billion as of Dec. 31, which also includes short-term portfolios and a captive insurance company formed in 2012, up from $88.5 billion in 2014.
The increases were due to the growing stock market around the world, he said.
Mr. Bachher warned at the meeting that the high returns the endowment and pension plans have enjoyed are "not sustainable and will go down."
Still, neither the endowment nor the pension fund has outperformed its benchmarks by wide margins. The endowment underperformed its custom benchmark by 1 percentage point, notching a gain of 14.6% gross of fees in the year ended Dec. 31, while the pension fund outperformed its benchmark by 50 basis points to 16.7% for the same period.
Both plans edged above their benchmarks for the 10-year period, by 0.6 of a percentage point each, to 5.8% for the endowment and 5.6% for the pension plan.
The University of California's pension plan fared better against its peers than the endowment for the year ended Dec. 31. The Wilshire Trust Universe Comparison Service universe returned a median 14.72% for plans of all types. Public pension plans earned 15.17% for the year, while foundations and endowments returned 14.72%.
As part of the revamp, the pension plan and endowment investment staff slowly have rolled out five new platforms, some of which are still evolving, over the past four years: Congruent Ventures, UC RNT Associates, Aligned Intermediary, Risk 3.0 and UC Ventures.
The University of California, in early 2017, committed $50 million to Congruent Ventures, a new energy seed-stage venture capital fund co-founded by Joshua Posamentier, who had been a principal at venture capital firm Prelude Ventures, and Abe Yokell, a former partner at Rockport Capital.
UC RNT Associates is a joint venture between the university and RNT Associates, the family office of Indian entrepreneur Ratan Tata. The university's investment office had first hired Mr. Tata in 2015 as a senior adviser to the CIO. At the time, the plan was to invest, over three years, up to an additional $1 billion in public markets and private assets in Asia, including India. So far, the university has paid $1.5 million in management fees and $442,417 in partnership expenses to RNT Associates through June 30, according to the university's private equity fee disclosure. The investment has produced a net internal rate of return of -6.88%.
Earlier this year, Mr. Tata's name was mentioned in a graft case the Israeli police have been pursuing against Israeli Prime Minister Prime Minister Benjamin Netanyahu. Mr. Tata has not been indicted and has denied wrongdoing. Mr. Bachher said the university still has its investment with RNT Associates and he has no knowledge of the situation in Israel beyond public reports.
Also in 2015, the university committed $500 million to Aligned Intermediary, which helps institutional investors find climate infrastructure projects in which to invest, such as clean energy and water infrastructure deals. Aligned is not included on the university's private equity fee disclosure form.
Risk 3.0 offers a new approach to risk management that looks into the question of what happens after an event that puts a portfolio at risk. It builds off traditional value-at-risk modeling that focuses on historical data as well as stress tests.
UC Ventures, first announced in 2014, was designed to be a venture capital program seeded with up to a $250 million commitment that would "pursue investments in UC research-fueled enterprises," according to a news release at the time. As part of the UC Ventures program, the University of California partnered with Silicon Valley entrepreneur Vivek Ranadive. Mr. Ranadive formed Bow Capital in 2016 and the UC Ventures program committed $100 million as an anchor investor in a Bow Capital fund.
But Bow Capital will not be strictly commercializing University of California discoveries, according to Bow's website. As of a March 31, 2017, report, the pension and endowment had $13.9 million invested in UC Ventures. Bow Capital did not release return or fee information, according to the University of California's private equity fee report.
'High conviction' discoveries
As part of the UC Ventures program, UC also co-invests alongside venture capital firms investing in "high-conviction" discoveries made at the University of California. The university also could hold stakes in new companies because the professors sometimes donate shares in their startups to the university.
Mr. Bachher and his staff acknowledge the university's pension plan and endowments are not yet reaping much benefit from these projects, according to the annual report for fiscal year 2017. "All of it is innovative. None of it was easy. It's an exploration, an adventure," the report noted. "We expect a sort of 'J-curve' from these innovative projects, an incubation period before the programs are at a point where they are ready to add value."
Even so, Mr. Bachher has made his mark on the plans' portfolios. Over the past four years, Mr. Bachher and his investment staff have decreased the number of managers and stepped up investments across asset classes. In 2017, the plans had 103 managers with an average mandate of $122 million, down from 175 managers running an average investment of $48 million in 2014. They sold off private equity limited partnerships, bringing the number of managers to 18 in 2017 with an average commitment of $103 million, from 28 with an average commitment of $38 million in 2014.
Investment staff also has revised the asset allocation of the plans so they no longer mirror each other. They boosted alternatives in the endowment and retained more assets in public equities in the pension fund, while tilting the equity portfolios toward passive strategies and non-U.S. stocks.
Mr. Bachher also added co-investments, making two co-investments in its private equity program. One was a more than $150 million co-investment in Duff & Phelps Corp. alongside a manager with which UC had not previously invested. Over two years, the investment gained more than $120 million, Mr. Bachher said during the March 13 investment committee meeting. He added that he also is increasing co-investments in real estate in an effort "to squeeze out costs."
Currently, $50 million is in three real estate co-investments.
Mr. Bachher also said at the meeting that over time, he will increase the commitment sizes of real estate and real assets, which are smaller than the other asset classes. While UC has fewer real estate managers than four years ago, 20 in 2017 vs. 37 managers in 2014, the average commitment size is similar, $23 million vs. $19 million.
"We're not going to keep writing $20 million checks," he said at the meeting, referring to the real estate portfolio. "That has to change."