University of California Shifts Assets from Public to Private Equity

The University of California has proposed reweighting the asset allocation of its general endowment pool by slashing its holdings in public equity, while boosting its investment in private equity.

“We’ve been spending a fair bit of time looking at how we’ve been invested and how we want to be invested,” said Jagdeep Singh Bachher, the chief investment officer of the University of California Regents, at a March 14 Regents Meeting.

Bachher said the University of California’s investment in private equity is half that of its peers, while its investment in public equities is double that of it its peers.

“With more volatility, or market-to-market changes in the public markets, you’ll see more noise in our results, versus the dampening from private assets,” said Bachher.

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The proposed changes include reducing the investment in public equities to 30% from 42.5%; increasing private equity to 22.5% from 11.5%; and raising absolute return to 25% from 23%. The changes also call for the consolidation of real assets and real estate into one asset group, while increasing the allocation to 12.5% from a combined 10.5%; and the consolidation of fixed income and liquidity into a single allocation to be weighted at 10% of total assets, which would reduce the fixed income current weighting by 2.5%.

“The changes that we are proposing in terms of asset classes and rebalancing are quite substantial,” said Sam Kunz, the University of California Regents’ head of asset allocation and investment strategy. “We made the conscious decision to use very long-term normalized returns, and that just means that we minimized the effect of the current market environment when we make our asset allocation… this asset allocation is very much focused on the long run.”

Asset Class	Current Weight	Proposed Weight	Change
U.S. Equity	21%	15.7%	-5.3%
Non-U.S. Equity	14%	11%	-3%
Emerging Market	7.5%	3.3%	–4.2%
Private Equity	11.5%	22.5%	+11%
Absolute Return	23%	25%	+2%
Real Assets	3%	12.5%	+2%
Real Estate	7.5%	12.5%	+2%
Liquidity	12.5%	10%	-2.5%

Source: University of California Regents.

The University had commissioned a study from Cambridge Associates to help it determine how to adjust its asset allocation. According to Kunz, the results from the study showed that the general endowment’s allocation risk was similar to that of a pension fund, and that it can afford to take a very long-term view of its investments.

“What we observed was really that the endowment is not something the campuses rely heavily on for their operating budgets,” said Kunz. “So the cash flow needed from this endowment is relatively low compared to some of our peers. That’s very important because it allows us to have a very long-term view and focus on the long term for our asset allocation.”

By Michael Katz

The European Parliament has adopted a revised shareholders’ rights directive it says will contribute to the long-term sustainability of European Union companies, enhance the efficiency of the chain of intermediaries, and encourage long-term shareholder engagement.

“We have learned our lessons from the past,” said Vĕra Jourová, the EU’s commissioner for justice, consumers and gender equality. “For a stable European economy, it is essential to look beyond fast profits and focus on long-term success.”

Jourová said the new rules will prevent short-term excessive risk-taking, and that shareholders will have more rights, including having input on directors’ salaries so that they are linked to performance.

The revision of the shareholders’ rights directive is intended to address “the shortcomings in the corporate governance of listed companies identified after the financial crisis,” said the European Commission.

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The main changes include:

Stronger Shareholders’ Rights, Facilitation of Cross-Border Voting

Intermediaries, such as banks, will have to ensure that they pass on the necessary information from the company to the shareholders, and from the shareholders to the company. The new rules also make it easier for shareholders who live in one EU country to participate in the general meetings and vote on issues for companies based in another EU country.

Long-term Engagement of Institutional Investors, Asset Managers

Institutional investors and asset managers are required to be transparent about how they invest, and how they engage with the investee companies. The new rules will require institutional investors to disclose how they take the long-term interests of their beneficiaries into account, and how they incentivize their asset managers to take these long-term interests into account. Asset managers will be required to report to the institutional investors for whom they manage funds how they have performed in relation to their mandate.

More Transparency of Proxy Advisors

The new rules will require proxy advisors to disclose certain key information about the preparation of their recommendation and advice. They will also be required to report about the application of the code of conduct they apply.

Shareholders Will Have a Say on Pay

The new rules will encourage more transparency and accountability about how a director’s salary is determined. Shareholders will have the right to know how much the company’s directors are paid, and they will be able to influence this. The Commission said it will guarantee a stronger link between pay and performance.

Related Party Transactions

Companies will be required to publicly disclose material related to transactions that are most likely to create risks for minority shareholders. Companies will also have to submit these transactions for approval from the general meeting of shareholders or of the board.

The new rules apply to more than 8,000 listed companies on the EU regulated markets, with a total market capitalization of approximately €8 trillion ($8.6 trillion).

By Michael Katz