I-2 Office of the Treasurer TO MEMBERS OF THE COMMITTEE ON INVESTMENTS / INVESTMENT ADVISORY GROUP: ACTION ITEM For Meeting of September 25, 2012 UNIVERSITY OF CALIFORNIA RETIREMENT PLAN / GENERAL ENDOWMENT POOL INVESTMENT POLICY AND GUIDELINE REVIEW AND RECOMMENDATIONS RECOMMENDATION The Chief Investment Officer, with the concurrence of the Regents’ General Investment Consultant, Mercer Investment Consulting, Inc., recommends that the Committee on Investments recommend to the Regents that the changes to the University of California Retirement Plan (UCRP) Investment Policy Statement (as shown in Attachment 1), the University of California General Endowment Pool (GEP) Investment Policy Statement (as shown in Attachment 2), and the Appendices to Investment Policy Statements of UCRP and GEP (as shown in Attachment 3), be approved, effective November 15, 2012. BACKGROUND Following the adoption of a new Investment Policy Statement for the UCRP in 2004 and GEP in 2005, the Office of the Chief Investment Officer has conducted an annual review of investment policy each spring. The purpose of this review is to review investment policies and guidelines in the context of changes in capital markets and investment practices, and, where appropriate, recommend any changes to guidelines that would better achieve the return and risk objectives of the Funds. A summary of changes is found below:
LOOSENING CONCENTRATION LIMITS ON FUND OWNERSHIP
Public Manager Concentration Guidelines: Increase the percent that UC’s investments can be in a particular product from 10 percent of the assets of that product to 25 percent. However, set a limit on the size of an investment in a single manager to be no more than 12 percent of each equity class aggregate (US Equity and Developed Non-US Equity) and 15 percent (Emerging Market Equity). This limitation would not apply to passive (index) managers.
COMMITTEE ON INVESTMENTS/ INVESTMENT ADVISORY GROUP September 25, 2012
A. Why: This would allow UC to have larger positions in products with small Assets Under Management, which are typically new products launched by existing managers or products launched by teams spun out of a larger organization. The limit on percent of fund in a single manager would ensure diversification. B. Impact: higher expected return. Note that risk is limited by the fact that public market assets are typically custodied by State Street, and thus under UC’s direct control. Real Estate Guidelines: Provide more flexibility by loosening concentration limits on fund ownership. A. Changes 1. Increase limit on size of investment in any one fund from 20 percent to 25 percent of the total capital being raised for that fund, not to exceed $75 million 2. Apply requirement for Separate Account managers to co-invest in UC deals 3. Increase limit on size of investment in club deals and co-investments, in aggregate, from 7.5 percent to 15 percent of total Program market value, up to a limit of $300 million on any one deal. B. Why: Concentration limits are designed to diversify the portfolio and limit potential losses. However, restrictions can also limit flexibility to take advantage of opportunistic investments. C. Impact: Higher expected return. Given the current degree of portfolio diversification, additional risk is expected to be minimal. Private Equity Guidelines: Provide more flexibility by loosening concentration limits on fund ownership. A. Changes 1. Standardize language regarding permissible investment structures. Permit publicly-traded assets. 2. Delete guideline relating to Fund of funds (superfluous). 3. Increase limit on size of commitment to any individual partnership is from 20 percent to 30 percent of the total capital raised by the partnership, up to a maximum of $150 million. 4. Delete quantitative restriction on portfolio diversification across time 5. Increase limit on size of a single co-investment deal from $20 million to $200 million. 6. Del