The Investments Committee of the Regents of the University of California on July 15 approved changes to asset-allocation targets across the system's endowment, pension and working-capital pools, moving funds out of hedge funds into public equities and formally adopting a 5% payout for endowment pools.
The vote followed a presentation by committee staff explaining that the proposed adjustments reflect five years of implementation and recent shifts in the interest-rate and market environment.
Committee staff said the general endowment allocation would change modestly by eliminating a roughly 10% allocation previously labeled as absolute-return/hedge funds and reallocating that weight to public equities. In staff's presentation, the general endowment was described prior to the change as roughly 40% public equities, 8% fixed income, 50% private assets and 2% cash; the committee was asked to codify the shift already being implemented and to broaden range bands for individual asset classes. Staff also asked the committee to memorialize that the endowment payout rate was set to 5%, a practice the office said it had already been following.
Staff presented similar, smaller shifts for the pension pool: hedge-fund allocations described at about 3.5% would be reduced to zero while public-equity exposure would increase, and a 1% cash allocation would be added for frictional needs. For working-capital (TRIP) the committee approved expanding the allowable private-asset allocation from 10% up to 40% to provide tactical flexibility.
Explaining the rationale, the staff member leading the presentation said public fixed-income yields are higher than in the past decade and thus provide an alternative to higher-fee, less-liquid private strategies. "Hedge funds are a fantastic business if you're in Wall Street," the staff member said, arguing the funds had not consistently hedged public-market dislocations and that lower-fee public allocations would simplify the portfolio.
Committee members pressed for historical data on hedge-fund performance, implementation details for private-credit exposure and the effect of the changes on long-term risk and returns. The staff said the office would provide additional historical performance data and that private-credit exposures would be implemented via third-party managers rather than in-house underwriting.
Regent Park moved approval of the asset-allocation and policy changes for the endowment, the Blue and Gold pool, the pension and the total-return pool; a second was recorded but not named in the transcript. A roll-call vote recorded ayes from Regents Aguayano, Cohen, Drake, Kamamoto, Lee, Liebe, Makarachian, Montesantos Park, Park, Riley Robinson and Wang; the item was approved.
Committee members and staff also discussed the university's long-term pension funding position during the meeting and asked for a fuller actuarial presentation at a later date. One regent emphasized that although asset values have grown substantially, liabilities and projected benefit costs have also increased and that contributions remain a key part of any long-term funding solution.
The committee also approved minor name and housekeeping changes to the investment policy materials, including updating the office name to "UC Investments," and directed staff to provide additional data on historical hedge-fund performance and the mechanics of implementing private-credit and other allocations.
The committee's action was procedural and binding for the university's investment office to implement under the delegated authorities the board grants to staff.