Annual Report Reflect


Keep it

Making things simple is complicated. But it's important.

At the Office of the Chief Investment Officer of the Regents (UC Investments), we manage close to $100 billion. Our work is complex, and explaining it can be complicated. But we see value in reducing complex theories and strategies into concepts that are simpler and easier to grasp. To us, simplifying is a way to stay focused on what’s important. Doing so keeps us on track to achieve our goals and fulfill our obligations to our stakeholders. As a bonus, it also makes it easier to talk about what’s happening in our office so all of our many stakeholders can understand what we’re doing and how we’re doing it.

Here’s what’s been happening.

Over the last year, we spent a lot of time taking stock. We reflected on our past 20 years of performance and asked ourselves some basic questions. “How do we earn the best returns for the university in the future?” “How do we best manage our office?” “How do we recruit and retain outstanding people?” “Are our processes working as well as they could?” “How can we make things less complicated?”

That last question really stuck with us. Because to us, doing the hard work it takes to make things simple is the most important thing we can do to set the foundation for our office — and the University of California — for the next 25 years.

So we focused on getting back to basics. We simplified. We focused on good governance. We kept an eagle eye on our costs. We cultivated an innovation mindset. And we stayed true to our core investment beliefs, even when the market threw us curve balls.

Because if there’s one thing we know, it’s this: Things change. It’s our job to take a long-term view, learning from the past so we can adapt to the future with intelligence, creativity and agility.

We know the choices we make today have a direct impact on the lives of our staff, students and faculty for generations to come. It’s a responsibility that’s both profound and simple, and it’s what drives us every day.

Q&A with
Janet Napolitano
University of California
janet napolitano

You’ve now served as UC’s president for two years. Could you talk about the culture you’re trying to foster at the university?

The University of California is the premier public research university system in the world, and we already excel in many areas. But there are opportunities for growth and innovation at every organization. I want us to be engaged and proactive, and I want us to be committed to excellence in everything that we do. We should always be asking, “How can we do better? How do we continue to compete with peer institutions and lead the way in higher education? What’s the next big challenge the University of California should tackle? What can we do to make a difference to the world around us?”

What is the relationship between the UC Office of the President and the Office of the Chief Investment Officer of the Regents (UC Investments)?

UC Investments reports to my office and the university’s chief financial officer on administrative matters related to their organizational support, staff, and budget. Beyond this, we’re trying to better integrate UC Investments into the operations of the Office of the President. We believe there should be more collaboration between these offices as we determine how the work of UC Investments can continue to support university initiatives and ensure a bright and stable future for UC.

Can you talk about how UC Investments is helping you implement these key initiatives, particularly your innovation and entrepreneurship programs?

The University of California has a tremendous impact on California’s economy, and we have an incredibly productive pipeline of innovation and entrepreneurship. We are the numbers-one patent producer in the country. And we’re the origin of 800 startups in the last 10 years alone.

We’re exploring a variety of ways that the university can better support and encourage the development of new companies and inventions out of the research done at our campuses. Capital investment is one important avenue. That’s why last year, the university announced UC Ventures, where we will provide direct investment support to the campuses and also partner with other venture capital funds to invest in UC-related research. UC Investments has committed up to $250 million to these efforts.

Partnering with UC Investments helps us think more creatively about ways to access the capital we need to support this priority, as well as other initiatives the Office of the President has launched, such as the Carbon Neutrality Initiative and the Global Food Initiative.

What do you think about what’s happening in the UC Investments office?

I think they are doing excellent work. They have produced results that have supported the university’s mission and helped us advance our strategic initiatives. Jagdeep Singh Bachher has a clear vision that I support. He is decisive, energetic, and creative in his approach to the issues the university is confronting. Jagdeep has successfully recruited several highly qualified senior leaders to join the UC Investments team. He has instilled a collaborative culture in his office, and members of his staff have become active and important contributors to the initiatives of the Office of the President. I look forward to continuing to work with his team.

What does UC Investments do to help you make your vision for the university a reality?

Two things are critical. First is identifying new ways to generate more operating funding from our investments — income that can be used to supplement the funding the university receives from the state. We reached a budget agreement with the governor and legislature last spring that puts UC on more solid financial footing, and we are very grateful for that support. But as the needs of our campuses evolve, and as the university continues to increase the number of Californians we educate, additional funding will be necessary. It will require us to be nimble and creative.

Another way UC Investments can support the university is by determining the ideal mix of investment products that ensure a financially viable pension program for our employees well into the future.

Q&A with
Paul D.Wachter
UC Board of Regents,
Chair of the Committee on Investments
paul Wachter

As your term comes to an end, what stands out in your decade-plus tenure?

There have been so many tremendous changes since I became chair of the Committee on Investments, but I think there are three seminal events of my tenure. The first is working with our last two chief investment officers to move our portfolio from old-school, plain-vanilla stocks and bonds to a more contemporary, active management model — some call it the Endowment Model, most associated with David Swensen of the Yale endowment — with more private equity, more absolute return and more real estate.

Second is surviving the financial crisis. Compared to most other pensions and endowments, we did extremely well — we escaped the liquidity issues and blowups that others had, and we emerged from the crisis with more confidence as a result.

Third is the hiring of Jagdeep Singh Bachher as chief investment officer. His personality is very well suited for the position. He’s an excellent communicator — which was a key asset we were looking for — and he’s already been proactive in shifting how we invest our different portfolios. With his leadership, we’re now refining our investment model in a variety of ways to be more of what we want it to be, not trying to replicate anyone else’s model. We are also looking more granularly at how the different products — the pension, endowment, retirement savings and working capital funds — should be invested.

The proof of the success of these three things lies in the numbers: We’re doing a lot better now — both in absolute terms and relative to our peers — than we were doing 10 years ago. I’m proud of that.

How does your committee work with UC Investments?

The regents set asset allocation and investment policy, and pretty much everything else is done by the Office of the Chief Investment Officer of the Regents (UC Investments). For example, we don’t pick the managers. The single most important thing in investing is asset allocation, but we do it at the big-picture level and give UC Investments a lot of latitude at the granular level within the asset allocation parameters, which we discuss as appropriate. I believe in the latitude, and because we have Jagdeep leading a great team at UC Investments, it works.

What’s your take on the change in culture at UC Investments over the past two years?

The office is responsible for close to $100 billion — that’s a lot of money, so you want to know what’s happening with it. In the past, we’d have more “stilted” committee meetings with only the highest-level managers presenting. Now, we’re getting the exact information we need presented in a way everyone can understand, and we’re hearing from a much broader range of people on Jagdeep’s team.

It makes me feel good knowing there are so many great people involved in the process, and it makes the meetings a whole lot more enjoyable. Everyone appreciates it.

Tell us about developing the system’s first-ever sustainable investment framework.

This was a long, collaborative process to determine how we can protect the performance of the products — so we don’t have to raise tuition, so people can depend on their UC pension and so we can have better pay across all positions — and at the same time making investment decisions that are in line with our values and those of our many constituents. Our sustainable investment framework demonstrates our commitment to not just divest, as we’ve done with tobacco and Sudan — decisions done with great circumspection — but also to putting our money into things that will actually move the needle on an important issue like alternative energy. I think we’ve done a really good job of creating a strategy that will serve us for the long term.

What advice would you have for Regent Richard Sherman, who will be taking over as chair of the Committee on Investments?

Make the meetings interesting and understandable. Try and make it so people are inspired to ask good questions. Make sure the committee has the information it needs to make sound decisions and be responsible fiduciaries. Try not to get mired in the technical stuff. Leave that to Jagdeep and his team. They’re the experts. They’re the investment professionals. We’re covered.

Our investment beliefs

Delivering value
through values.


Invest for the long term.

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.


Invest in people.

The contributions of talented people are among the most important drivers of success for any investment organization. So we’ve made the recruitment and retention of exceptional staff a cornerstone of our strategy.


Build a high-performance culture.

Every organization needs a clearly defined culture to make sure everyone is working towards the same ends and speaking the same language. Our culture is one of responsibility, accountability and high performance. We are proud of our achievements but try to be humble, as markets sometimes surge and fall without warning.


We are all risk managers.

Our aim is simple: to earn the best risk-adjusted return that meets the objectives of our various portfolios. But achieving that aim is complex. An effective risk-management function is critical, enabling the leadership to delegate authority to the investment team. Everyone on the team is in the risk-management business.


Allocate wisely.

The key to investing, and the most important driver of performance, is asset allocation. To make effective investment decisions and achieve the appropriate combination of risk and return, we have to maintain a clear and balanced understanding of stakeholders’ unique objectives, time horizon, risk tolerances, liquidity and other constraints. As a globally significant investor, we also aim to make the most of our scale and patience when we allocate assets.


Costs matter.

High-quality advice comes at a cost. We get that. But we also believe fees and costs for external managers must be fully transparent and straightforward. Anything else creates potential problems — opaque fees can mask risk. Plus, cost savings can be considered a risk-free return. If we can save money through efficient, well-executed strategies, then we must. We intend to capture every dollar of this risk-free return that we can.


Diversify with care. Act with clarity.

Diversification is invaluable, but it’s not a cure-all. It allows us to spread risk and reduce the impact of any individual loss. But diversifying too broadly can draw investors into assets and products they don’t fully understand. We prefer a more focused portfolio of assets and risks that we know extremely well. We also need to be keenly aware of our own strengths and weaknesses in the global context in order to act decisively when we believe markets are behaving irrationally or when we have a skill or knowledge advantage. That means keeping a constant, clear-eyed check on our evolving capabilities. It’s not always an easy or painless process, but it’s an essential one.


Sustainability impacts investing.

Sustainability is not a “check box,” but rather, a fundamental concern that we incorporate into decision making. We focus particularly on how sustainability can improve investment performance. Sustainable businesses are often more rooted in communities and resilient to future crises, which means investing in them makes good business sense. They are bound to affect portfolios in the future, and we need to consider them in our broader lens of investment decision making.


Collaborate widely.

We are proud to be a part of the University of California, as well as the broader community of institutional investors. Through active collaboration, we aim to leverage the unique resources of the university. We also want to foster collaborative relationships with our peers to leverage our long-term competitive advantages.


Innovation counts.

The best investors recognize that markets are constantly fluctuating and that no good idea lasts forever. We must always be innovating and identifying new opportunities. Getting in early brings rewards. Just as importantly, some of the best opportunities transcend asset-class silos. There are advantages in thinking differently and partnering with peers that are willing to work with us on innovative projects. Collaboration is one of the most powerful drivers of innovation.

Sustainable Investing

Investing in
a better world.

As the pace of change in our world continues to accelerate, we recognize that evolving long-term risks and opportunities, such as global climate change, water scarcity, income inequality and an aging population, will influence our investment returns in the future.

So over the past year, we invited our stakeholders — students, faculty, staff, alumni and the public — to share with us their views on how best to manage our investments in a way that advances our common aspiration for a safer and better world while also improving our returns.

The result is UC Investments’ first-ever sustainable investing framework, which has been crafted to guide our philosophy of long-term investing in — and for — the future, as well as provide a key metric for evaluating risk.

Sustainability impacts investing.

Climate change

Continued emissions of greenhouse gases will cause further warming and changes in the climate system.¹ A transition to a lower-carbon economy, including low-carbon sources of energy, is necessary to ensure the health and well-being of future generations. Given the scale of existing infrastructure and the challenge to quickly shift the transportation sector to low-carbon fuel sources, this transition requires a multi-generational effort.


Food and water security

Global climate change, population growth and rapid urbanization are intensifying the strain on global water and agricultural systems. Human well-being is inexorably linked to water and food security, and failure to adequately ensure these basic needs for future generations will undermine global economic welfare, human security and political stability.



Addressing inequality is both a responsibility and an opportunity.² Solving inequality of opportunity can create new demographics that can contribute to economic progress and widen the market for goods and services, creating a more profitable and sustainable business climate.


Aging population

Rapid aging of populations will be a transformational force affecting society and the global economy, requiring new approaches to health systems, workforce organization, intergenerational relations and public finance.



Diversity enhances economic, social and environmental outcomes for business and society.


Human rights

Businesses whose profits are derived from direct harm to public safety, theunlawful deprivation of human dignity or the exploitation of children or other vulnerable workers undermine universally approved principles of the United Nations and create a seriousthreat to the conditions needed for a well-functioning, market-based global system.


Circular economy

The “take, make, dispose” pattern of growth is an unsustainable economic paradigm. We must transition to a more circular economy in which intelligent design allows us to decouple economic growth and development from consumption of finite resources.


Ethics and governance

Our market economy system relies on trust as a fundamental cornerstone. Good corporate governance and proportionate, transparent and responsible regulation are vital to well-functioning and sustainable financial markets. As long-term investors, we seek the sustained returns associated with strong governance, rather than the rapid gains that can vanish quickly if they are rooted in corruption, fraud or falsification. Recent financial crises highlight how destructive such fraud and corruption can be to the proper functioning of credit markets and the preservation of personal and corporate wealth.

1. Intergovernmental Panel on Climate Change (IPCC), the leading informational body for the assessment of climate change. The IPCC was established in 1988 by the United Nations Environment Programme and the World Meteorological Organization (WMO) to provide a clear scientific view on the current state of knowledge on global climate change.

2. World Economic Forum (Davos)

Our Products

Here today,
here tomorrow.

For every product we manage, our approach is the same: We invest for the long term and don’t get distracted by the daily whims of the market. This approach has served uswell over the years; in fact over the past 20 years, we’ve tripled our assets under management: from $28.3 billion in 1995 to $98.2 billion as of June 30, 2015.

These assets are contained within our products: the UC Endowment, Pension, Retirement Savings and Working Capital. Each product is substantial on its own, and when combined, their size, scale and flexibility allow us to take advantage of unique investment opportunities.

This was a year where we did exactly that.

First, we simplified our portfolios and reduced our number of external managers to align with the risk and return objectives of each of our products. We also took profits by selling positions where available. All combined, this resulted in almost $10 billion of inflows—$6 billion of which was reinvested — ending the year with $4 billion in cash.


A healthy

With the university’s Endowment, we’re focused on maximizing value while maintaining enough liquidity to support future spending and protect against a potential prolonged market downturn. We always strive to ensure that payouts from the Endowment are equal to the needs of the campuses and our affiliates that rely on it. Once that’s achieved, we turn our attention to growing the value of the principal.

In the past decade, we’ve actively worked to shift our investment strategy to a more contemporary model, adding other types of assets such as private equity, absolute return and real assets to our traditional mix of equities and fixed income.

The shift in strategy is paying off. Our Endowment posted strong results on a risk-adjusted basis with a fiscal year net return of 7.2%. We had more than $350 million in inflows.The Endowment payout was $268 million for the year, and over the past decade, the Endowment has paid out $2.3 billion.

We’ve been building up liquidity to be ready for new buying opportunities, while also increasing our active management, rationalizing our portfolios, concentrating our investments and identifying opportunities where we can act as partners and collaborators with our external managers and peers.

All of this is in service to our goal of creating our own unique investment model, one that allows us to take full advantage of our size and scale to generate the best risk-adjusted returns possible for the University of California.



Our core objective for the Pension is to meet the plan’s liabilities within the bounds of the Board of Regents’ funding policy.

We began managing the pension assets of 3,353 members— a total of $100 million — in 1961. Since then, the pension has grown 50-fold, both in members and assets, and today has more than 220,000 members and $55 billion in assets under management.

We actively manage 70% of the portfolio. Eighty percent is managed through third parties. Much of the risk in our portfolios comes from equity exposure. And while we know risk can never be eliminated, we believe it can be managed, and we take risk into account when defining expectations for return.

In fiscal year 2014–2015, the plan made benefit payments of $1.3 billion and received $1.8 billion in contributions, setting the net cash inflow at $500 million. The funded ratio on a market value basis now stands at 84%. As of June 30, 2015, our assets stood at $55 billion, which reflects a healthy gain of $2.3 billion from the markets. Over the past decade, the pension has gained $27 billion from the markets.

Institutional Investor recognized UC Regents as the 2015 Large U.S. Public Pension Plan of the Year.

Retirement Savings

Design your

Along with our Pension, we provide a participant-directed Retirement Savings program for UC faculty, staff and retirees. This is central to the university’s mission of providing a robust, flexible benefits program that gives everyone the chance to build a secure financial future. It has become an increasingly important way for us to meet the evolving needs of our workforce.

Our program is now one of the largest of its kind in the United States, and it continues to grow. A decade ago, our assets were at $8.8 billion, and today we have over $20.1 billion in total plan assets and more than 290,000 UC employees enrolled. Our participants are saving about $1 billion a year, with the largest allocations invested in the following funds: Savings ($4.3 billion), Global Equity ($4.3 billion), Target Date ($3.1 billion) and Balanced Growth ($1.6 billion).

The industry trend is to move to a smaller menu of fund choices so it’s easier for people to design their own retirement program. So working with our participants, we’ve transitioned from 192 funds just two years ago to 16 fund choices today.

Our participants are working hard to save for their retirement, and we’re here to support them.

Working Capital


Our Working Capital — the money that keeps the vast university “machine” moving — is invested in two investment portfolios: the Short-Term Investment Pool and the Total-Return Investment Pool.

We now have $14 billion in Working Capital across both programs. During the year, UC campuses took advantage of the gains in the market and harvested $800 million of distributions. This money was used to fund various projects across the system such as facilities upgrades, deferred maintenance and academic programs.

The Short-Term Investment Pool (STIP) is a highly liquid cash pool available to all university groups to fund daily operating cash flows. The pool takes advantage of our institutional size by investing in a broad range of maturities, thereby maximizing income on the cash balances. This strategy has enabled STIP to invest in longer maturity, higher-yielding securities, which has kept the running yield higher than comparable money market funds even as rates have declined. With the anticipated rate hike, STIP will be managed more conservatively by investing in shorter maturity paper that could result in an annual yield of less than 1%.

The Total-Return Investment Pool (TRIP) allows all campuses, as well as the Office of the President, to maximize return on their longer-term working capital, subject to acceptable risk. Working with the investments, operations and finance teams across the university, we help shape our capital and liquidity strategy to meet the objectives that make the university work. We combine internal and external management, employing actively managed strategies where appropriate and monitoring the program relative to its guidelines.

Our goal is to balance the mix between STIP and TRIP in order to maximize the risk-adjusted returns and provide the ability for the campuses to earn additional discretionary income and gains.

That’s why we continue to reduce risk in the TRIP portfolio and have begun transitioning to the new approved asset allocation effective July 2015: shifting to more income producing and less growth assets. Every $1 billion invested in TRIP produces an average of $45 million versus $15 million in STIP. So on September 1, 2015, we moved $1.2 billion from STIP to TRIP, and we continue to work with campuses to enhance returns on discretionary funds.


to embark.

What have we learned by looking back 20 years? A lot. During the past two decades, we’ve tripled our assets, and our shift to managing our products as separate entities has reaped substantial rewards. Each product now has a size and scale that give us tremendous advantages in the market.

It would be tempting to stay the course. But in today’s rapidly evolving market landscape, we can’t rest on our laurels. We must be agile. We must be strategic. And we must create our own unique investment model, one that capitalizes on our advantages and that will help us navigate the future.

We’re ready to embark.