Where we can, we focus on investments over 10 years and beyond. This offers many more opportunities than those available to short- and intermediate-term investors. We aim to make the most of our scale and ability to be patient.
Jagdeep Singh Bachher
and Vice President of Investments
When I joined UC three years ago, I came in ready to listen and learn. I believed that before I could begin to create the strategies that would secure our future, I first had to understand the UC Investments Team, the Office of the President and indeed the entire University system. It was only after months of discussions and meetings with students, faculty, our investment partners, my team and many, many others that I began to see areas where we might improve, innovate and reset our foundations for long-term success.
What was clear to me in this process was that while the traditional model of endowment management was a good one, we are not a traditional university. We are an exceptional university. Quite literally, we have no rival on this planet (or, as our astrophysicists tell me, any other planet) in terms of research dollars deployed, awards given, patents filed and so on. In addition, our size and scale as an investment office presented both opportunities and constraints that were rather different from some of our “peers.” Moreover, the investment world in which we have been living for decades was about to be turned upside down, as many felt (and feel) we’re entering a prolonged low-growth environment.
So we needed to change. We needed to chart our own course. And to do that, we needed to truly understand ourselves and where we could compete in the global market for investments.
In the past three years, I’ve worked with people from every nook and cranny of the university. I’ve called upon our alumni to serve this university once more. I’ve sought to utilize the global reputation of our ten campuses, five hospitals and three national laboratories to develop a unique and thoughtful approach to investing. I’ve been building our own way of investing, what we have been calling the “UC Investments Way.”
We’ve realized that we’re not just investment managers focused on racking up assets in hopes of a good return. No, we are, first and foremost, risk managers who assess each decision based on how much risk we can tolerate. This year, we finished our new asset and risk allocation plan — three years in the making — and it is serving us well.
Another major shift we made was in our culture. We went from being siloed by asset classes to being focused on what will best serve our products and clients, from students to faculty, from chancellors to CFOs. That’s because we realize there are no holidays when it comes to delivering on the needs of our customers. Every UC stakeholder has distinct and urgent needs: a paycheck, a new piece of equipment, to see their nest egg grow. We’re here to serve them.
We’ve also worked to further entrench a culture of transparency. We go beyond just reporting results that get produced out by our systems. We take the time to do a deep dive to assess, compare and distill so that we provide results with the type of valuable context that helps us make better decisions.
For all the progress we’ve made in creating our own way, the thing I’m actually happiest to report this year is that we are now thought of as a true partner that’s integral to the success of UC. After years of operating as an isolated office, we’ve not only broken down silos internally, we’ve helped create a symbiotic and truly transformational relationship between our office and those we serve.
As I said at the beginning, I didn’t have a plan to do this when I got here; there was no slide deck that predicted the Return on Investment (ROI) of this collaborative approach. It’s been a grassroots process, one conversation at a time. One meeting at a time. One faculty member. One student. One Regent at a time. We’ve done a lot of listening. And we’ve made our default response to any challenge “Let’s work together. We can figure this out.”
We’re here to collaborate. We’re here to learn. We’re here to serve. And we’re humbled to have this responsibility.
University of California
In a University as big and bold as ours, a culture of collaboration and innovation is a key to our success.
Over the past fiscal year, the UC Investments office has been an integral partner as we have moved forward together on some of our most important and exciting initiatives.
California has long led the nation on sustainability, climate policy and clean energy, and the University of California has taken groundbreaking steps to achieve carbon neutrality and other sustainability goals consistent with the state’s actions and the Paris agreement. At the same time, through our Framework for Sustainable Investing, we have worked to ensure that the investing decisions we make both reflect UC values and earn a competitive return.
Another area of collaboration I am particularly proud to see growth in this year is our UC Ventures program. In just its second full fiscal year of operation, UC Ventures has generated high-quality investments with top-tier co-investors, capitalizing on UC’s “homegrown” talent, then investing that value back into UC innovators.
The UC Investments team continues to serve as a valuable resource and partner as we pursue the best investment strategies for UC stakeholders. We have worked together this year to secure the long-term stability of the UC Retirement Plan (UCRP) for our faculty and staff. UC Investments has made significant progress in other areas as well, revitalizing our captive insurance program, optimizing our Working Capital and General Endowment assets to increase spending for research and initiatives across the UC system.
Together, we will continue to work to not only strengthen the core research and public service efforts, but also to guarantee that the next generation of Californians has the same exceptional higher education opportunities as past generations.
Our collaboration is an investment in the future that will enable us to preserve UC values, support innovation, increase sustainability and grow our assets while expanding opportunity for all Californians.
Chair of the Investments Subcommittee
You are in your second year as Chair of the Investments Subcommittee. What is one area you feel UC Investments made the most progress on this past year?
The work we’ve done this year to advance UC’s commitment to the fight against climate change is definitely a high point for me. We have committed to carbon neutrality by 2025 for our ten campuses, five medical centers and three national labs, and we’ve signed agreements to buy 80 megawatts of solar power, the largest amount owned by any U.S. university. The U.S. Environmental Protection Agency has also named us among the nation’s distinguished leaders in the use of clean, renewable energy.
To date, we are the only institutional investor that is a signatory to Bill Gates’ Breakthrough Energy Coalition, and earlier this year, we contributed $50 million to Congruent Ventures, a new energy seed-stage venture capital fund. We are also allocating $100 million to a fund that will target high-performing, mission-based companies that deploy clean energy, health, water and sustainable agriculture solutions.
And though our holdings of securities of oil and gas drilling and refining firms now represent only about 3 percent of UC’s total public equity holdings —below the real-world average of 6 to 7 percent share of the global economy — we continue to look critically at all our fossil fuel investments on a regular basis under our sustainable investment lens, and we are working to position our portfolio to acknowledge the transition to low carbon energy. This is imperative.
Last year’s numbers were down. This year’s were up. How does UC Investments approach such an unpredictable environment?
I’ll start by saying that it’s important to note that part of the reason we had a great year this year can be directly attributed to the implementation of our asset allocation by Jagdeep and his team. But in general, we’re approaching this as a continued low-growth, low-return environment, and we have to temper our expectations accordingly. Because even though the equity market has done well, wage growth is still pretty low, inflation is growing at a small rate, and the federal reserve is unwinding its $4 trillion balance sheet. All of this means we’re in uncharted territory and so in a place of extreme caution. We have to stay highly attuned to where our assets are deployed on a broad level and moderate our return expectations for our products.
The UC Ventures program is still in its infancy, but it had quite an active year.
Yes, it’s exciting to see UC Ventures really start to gain momentum. Given the significant number of inventions and patents created daily in our system, we are looking to capitalize on these opportunities as part of our overall private equity strategy. We’re looking to “eat our own cooking.” It’s going to take some time to deploy that money and it’s a long harvest period — so we have to be patient, but we’re long-term investors; we can do it.
What do you think of the work UC Investments has done to further evolve its culture and strategy over the past year?
One thing I’ve been very happy to see in my first full year as chair is the right-sizing of UC Investments, both internally and externally. They’ve continued to reduce the number of external managers and are now working with only the best of the best. And because we now have more dollars with fewer people, we’ve been able to negotiate better, performance-oriented fee structures. In fact, our overall cost of managing $100 billion continues to shrink, and for the office, it costs us only 3 basis points for our investments and operations.
In terms of strategy, we transitioned a significant part of the public equity portfolio to passive management (index products), which have historically been proven as a better way to go. We’re also well on the road to outsourcing our defined contribution plan target date investment options. Overall, this plan is in excess of $20 billion, so this will make a big difference and will be much more efficient both for UC and for our participants.
Finally, I’m very impressed with the overall culture of collaboration, transparency and excellence in the office. All the staff are working really hard with a shared focus. Egos are checked at the door and everyone talks to each other, not just to those who work in their own specific area. It’s an all-for-one and one-for-all approach that makes the office stronger.
The world around us continues to change, sometimes in dramatic fashion. Massive technological revolutions in the investment industry and beyond. A shift in the balance of power away from short-term investors toward large, long-term investment organizations like ours. Unknowable global financial risks.
To keep up with the external forces that threaten to disrupt our plans and even beliefs about the world, we’ve had to forge a new path. And we’re rewriting some of the rules of our organization along the way to take advantage of these shifts and prepare for the world ahead, while still delivering on the core promises that we’ve made.
This is why we’ve been so preoccupied with innovation and efficiency.
These are the actions that the great organizations — the ones that last — do and do exceedingly well. But great organizations are a rarity, since the natural state is to be either innovative or efficient. It’s kind of like oil and vinegar: one does not naturally go with the other without a concerted effort at combining the two, often through vigorous shaking. But the results can be delightful.
So in pursuit of this duality, we’ve had to be proactive about shaking up our own organization. It’s not always pleasant, but we hope the outcomes will be delightful and rewarding for our organization and the university we serve.
How we’ve been shaking things up over the last three years:
- We empowered people and built a culture of accountability and creativity.
- We expended internal resources to build stronger relationships with our sponsors and stakeholders, which has given us more leeway to try innovative things.
- We built a quasi research and development team that’s been running for three years.
- By doing fewer, simpler things, we’ve been able to combine innovation and efficiency in the organization (if not in the same strategy or approach to the market).
- We re-negotiated our fees and costs we pay to our partners, as we view them as key elements in ensuring an alignment of interests and long-term performance.
- We changed our focus. We are product-centric and risk savvy. We are collaborative, innovative and solution-oriented.
And here are some of the positive shifts we’ve seen:
In the last three years, we’ve explored dozens of ways to shift how we invest in assets and have actually launched five new platforms: UC Ventures, Aligned Intermediary, Congruent, UC RNT Associates (with Ratan Tata in India) and Risk 3.0. Each of these new programs seeks to capitalize on our comparative advantages in the marketplace, while exploring new ways of accessing assets.
All of it is innovative. None of it was easy. It’s an exploration, an adventure.
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. We believe we’re now coming out of the low part of the curve, and looking to the future, we’re convinced we have the pieces in place to perform well.
In this year’s annual report, we offer a deeper look into our shift to an innovative and efficient organizational culture.