The CIO

Big picture? It was getting old. But our job isn’t to react to every dip and spike of the volatile markets, or to simply wring our hands. Our job is to assess the state of the world as it is, calculate the risks, and thoughtfully and assuredly position our portfolio for the long-term benefit of the University of California.

So we did what we know works. We stuck to the 10 pillars that define our UC Investments Way culture, the first among them “Less is More.” We sold some $4 billion in real estate into a rising market, including office buildings with an uncertain future in a post-pandemic work world. To manage global risks, we shored up some $12 billion in the early days of rising interest rates with the added benefit of making us a valuable liquidity provider and, finally, we earned a return on cash. We continued paring the ranks of our active managers in the public markets – and with them, their fees – in our shift toward index funds that are hard to beat. The sale of our fossil fuel assets catalyzed more investments in renewables that will sustainably fuel our planet’s future. Keeping a lean operations team meant we relied on state-of-the-art technology to streamline our workload and keep us rich in the data we need.

It paid off. At the close of the fiscal year, the portfolio stood at $164 billion, a $12 billion increase from the year before that was helped by market enthusiasm for artificial intelligence and a 73% increase since I joined the university nine years ago. The pension was up by 10.1%, while the endowment returned 8.8% and working capital, 7%.

Today, the system-wide UC Investments office is nearly unrecognizable from the one I joined in 2014. Our 10 pillars encapsulate the foundational changes we’ve made and prepare us for what’s to come. We’ve built a collaborative, creative culture focused on how best to serve our UC stakeholders, not merely in a single year, but for at least the next 100 or so.

On a personal note, I’ve taken more time to think, learn, and strategize over this past year. That’s meant fewer meetings, and bigger moves – the biggest among them our $4.5 billion investment in Blackstone’s real estate investment trust, BREIT. This transaction that made headlines around the world showcased the wisdom of Less is More and cemented UC’s powerful reputation as an investor rather than simply an asset allocator. A Wall Street Journal headline read, “University of California’s terms on BREIT fund are comparable to Warren Buffett’s 2008 Goldman deal.”

Like most financial reports, the bulk of this 2022-2023 annual report is about the numbers. But numbers don’t tell the whole story, neither of this fiscal year nor of those that have come before. It’s this other story, one far richer and multidimensional, that makes my role at the University of California so rewarding.

When I think of the endowment, for example, it’s not simply about whether the unit value is up or down. It’s about the people – our students, faculty, and staff – who directly benefit from the 6,741 separate funds, or endowments within the endowment, that make up the General Endowment Pool. Thanks to annual payouts, these UC stakeholders are able to study, research, teach, and improve the lives of so many others that they touch. And that’s only because our campuses, medical centers, and thousands of individual donors to the University of California have entrusted us to invest their pooled assets. Over the past nine years, our campuses have sent us nearly $10 billion to manage on their behalf in the endowment, which is about $2 billion more than the total value of the pool when I joined the university in 2014. It’s all about paying it forward. It’s a humbling responsibility that motivates our team.

“But numbers don’t tell the whole story, neither of this fiscal year nor of those that have come before. It’s this other story, one far richer and multidimensional, that makes my role at the University of California so rewarding.“

In the same vein, our working capital portfolios have afforded me the opportunity to act as in-house “wealth advisor” to our campuses and medical centers with the goals of maximizing returns, managing risk, and ensuring liquidity is available when needed. I think of our Short-Term Investment Pool much like a checking account, which campuses should use for at-the-ready cash, whereas the Total Return Investment Pool, with a different asset profile, provides a better return on capital that our UC clients might not need right away. Even better in that regard is our Blue & Gold Pool, which acts as an endowment but, as proven during the pandemic, is more liquid than the General Endowment Pool. As of June 30, 2023, the Blue & Gold was our best performing investment product, with a 13.3% return.

And, of course, what we broadly refer to as “retirement” is all about people and their long-term financial security, which goes a long way toward making dreams come true. It’s no secret that traditional pensions, which place the funding onus on employers, are becoming rare. But at UC, this amazing benefit is very much alive and 258,485 people have chosen to be part of the plan. Even with a relatively high investment hurdle (discount rate) of 6.75%, today the pension is 83% funded on an actuarial basis, which has spared the university and its employees larger contribution increases. This is especially important during bumpy markets, because with annual net cash outflows of more than $1 billion, strong pension returns have kept this retirement lifeline from falling into a deep hole.

One thing I have had very much top of mind this past year is that our hundreds of thousands of UC retirement savers come in different ages, with different income levels, and with different dreams. Half of the 335,000 participants in our defined contribution plan, for instance, are under 40 years old. To them, “retirement” may seem as distant and old-timey as their grandfather’s Oldsmobile. They’re focused on growing their assets, are less risk averse, and because they might not stay at UC for their entire careers, they want to take their growing portfolios with them if they move. So we’ve given retirement savers some new higher growth funds in which to invest, and we’re planning for more. For those who are closer to retirement, we’re going to make it easier to model out their retirement income and continue to demystify the process of picking the best investments tailored to an individual’s needs.

There’s no playbook for managing the money of the world’s greatest public research university and the wonderfully diverse group of people who help it thrive. At UC Investments, we’re wealth advisors, investment bankers, asset managers, and then some. To say we are committed to paying it forward means that we add value in dollars but also to people, including through programs intentionally focused on driving diversity and bringing unique opportunities to our UC students. Count among these opportunities the UC Investments Academy, fellowships for UC students and post-docs to the Lindau Nobel Laureate Meetings in Germany, our partnership with the Toigo Foundation, which advances inclusive leadership in finance, our own internship program, and more.

To succeed at all this, it takes experience, agility, and the confidence to innovate and move when others are hunkered down. It takes talented and dedicated staff; at 50 people, UC Investments is remarkably lean. We keep on track by staying laser-focused on the pillars that have served us well, which helps tune out the noise.

Fundamental to this strategy has been the calm, confident wisdom of Regent Richard Sherman, who has served as chair of the Investments Committee for the past eight years and will move to vice committee chair in the coming year. Richard has been a true partner to UC Investments. Key to his legacy on the board will be the change in asset allocation, in the middle of the pandemic, that added billions to our bottom line and his strong belief that to consistently beat the markets, UC must leverage its size and scale. I look forward to working with the committee’s new chair, Regent Mark Robinson, as well as our UC president, Dr. Michael Drake, in 2023–2024.

I am proud of the work our office did this fiscal year, as I am every year. Our partners added value in dollars, in opportunities, and in insights. We’ve deepened relationships and added new friends. I’m optimistic, and excited, about what’s to come. We’re on the cusp of a dynamic new era of innovation and technological advancement, especially in the United States, I believe. And geopolitical shifts should bolster Asian nations that had long been in China’s shadow, including an ascendent India and Japan. I look forward to a new year of engagement, exploration, and growth.