Strategy Overhaul for UC Regents Fund | Chief Investment Officer

The University of California Regents is planning a major overhaul of the target asset allocation and benchmarks for its long-term investment pool.

CIO Jagdeep Bachher proposed more than doubling the $7.6 billion Total Return Investment Pool’s (TRIP) exposure to fixed income, and wants to slash the target for equities, according to documents on the UC Regents’ website.

The new strategic asset allocation would also involve cutting out real estate investment trusts altogether—currently TRIP has a specific allocation of 10% to this sector—and removing “cross asset class” as a specific allocation, following a “strategic review and exposure analysis.” The fund’s current 10% allocation to absolute return strategies would be increased to a target of 15% under the proposals.

In a presentation to the board of the Regents, Bachher recommended changing the pool’s equity benchmark to the MSCI ACWI IMI index, cutting back on emerging markets and increasing exposure to non-US developed markets.

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In fixed income, the new benchmark informing its revised target allocation would be the Barclays Capital US Aggregate index. This would remove emerging market and high yield debt from the target allocation.

“Allocation to emerging market debt and high yield represents opportunistic bets in fixed-income markets, and removing them from benchmark will provide the ability to better assess the impact of our decision to over or underweight these exposures given market conditions,” Bachher wrote in the presentation.

TRIP asset allocation changes

The changes are designed to reduce the risk in the TRIP and “optimize allocation” between the three main investment pools overseen by the Bachher’s office.

Since August 2008, TRIP’s equity has doubled from 25% to 50% of the portfolio, while fixed income has fallen from 75% to 37%. The portfolio had 13% in alternatives at the end of March, having introduced this exposure in August 2013.

As well as TRIP, Bachher and his team manage a short-term investment pool, with $8.3 billion in assets, which is designed to provide funding to briefer projects for the university, and the general endowment fund, which provides income for individual endowments.

Since Bachher took charge of the University of California’s investment department last April, he has hired or promoted more than a dozen staff members, including two former public pension CIOs: Scott Chan and Sam Kunz.

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A functioning cross-border capital market—one not reliant solely on banks—could be possible if European nations ran large, funded pension systems and invested rather than saved money, research has claimed.

“Bigger pools of long-term capital could provide a huge boost to capital markets in Europe.”— William Wright, New FinancialUK-based think tank New Financial said that if countries with relatively small and funded operations—including most in Eastern Europe and the Mediterranean—increased their invested retirement assets, a functioning capital markets union could be possible.

“At one extreme, Denmark has combined pensions and insurance assets of nearly 300% of GDP, compared with an average of 98% of GDP across Europe,” said William Wright, director at think tank New Financial. “At the other end of the scale, a large number of smaller countries have pools of assets that are just one tenth as deep as in Denmark and less than one third of the European average.”

Wright claimed by increasing the level of assets relative to GDP to the continent average, there would be a further €6 trillion available to fund loans and investment to European commercial ventures. This would represent a 45% increase on current available capital.

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“Bigger pools of long-term capital could provide a huge boost to capital markets in Europe,” Wright said.

The research showed that Europe did not have a savings problem—it saves a higher proportion of GDP than the US—but an investment one as it fails to convert these reserves into investments.

Make this change would not be straightforward, however.

“Part of the challenge for capital markets union is that pensions policy is beyond the remit of the European Commission (EC) and is intimately tied up with culture, social policy, and taxation in individual countries,” Wright explained.

He suggested the EC could work with member states to encourage the proliferation of large, long-term capital stores and the help the wider shift from savings to investments.

“Highlighting the concrete impact that building deeper pools of long-term capital could have on the economies of individual countries that don’t already have them could help make a better case for capital markets,” Wright said.

More detail on the proposal can be found on New Financial’s website.