Listen to Regents Investment Committee: 9-25-12
The Regents Committee on Investments met on Sept. 25, 2012 to review investment strategies regarding the general UC endowment and the pension fund. There was also a review of campus foundation investment policies and results. Generally, the staff presentations involved requests to lift various constraints on investments. Much of the explanation was that if we had more flexibility, we could have higher returns. At one point, the presentation seemed to say that if we are constrained to emulate the benchmarks, we can’t out-perform the benchmarks. That proposition is true, of course. But you can’t underperform either.
If you listen to the audio, you get the impression that not all committee members were able to understand fully what was being proposed, although eventually what was proposed was endorsed. This area is really complex and the Regents could have benefited from another independent “second opinion.” There was a consultant on hand. But there are top financial experts on the faculty at various UC campuses that might have been consulted through the Academic Senate. Apparently, however, the only real expertise the committee had from the academic side of UC was a graduate student observer – an MBA student interested in finance – who was grateful to be there and said so in a short statement at the end of the meeting.
In some cases, if we were to have significant portfolio losses in the future, the joking around at the hearing – on the public record – could come back to haunt us. Members were reminded at the beginning that the meeting was going out on the Internet – but it is easy to forget that people are listening. The larger problem is that the argument that allowing more flexibility could produce higher returns – sometimes with after-the-fact anecdotes cited as evidence – by itself is too abstract to make a judgment. More flexibility could also produce lowerreturns. The precise incentives given to investment managers can sometimes produce perverse results, a kind of asymmetric reward for risk taking. That is one reason why constraints are imposed. That’s why true due diligence would involve obtaining more independent analysis and why getting such advice from faculty financial experts would have been a Good Thing to do. It may be that everything ultimately endorsed by the Regents was for the best. Yours truly can only judge the process, not the outcome.
Review of the campus foundation endowments was rather perfunctory. An earlier post on this blog noted that UCLA’s endowment investment strategy, as reported to the Regents, seemed somewhat unconventional. But it was noted also that whether in the long-term or the short-term, UCLA seemed to be getting lower returns than the median for the UC campuses. UCLA wasdescribed as “aggressive” in its investment strategy at the meeting but all the campuses’ strategies – including that of UCLA – were blessed. The presentation concluded that the analyst was “comfortable” with all the campuses. It may be that the Regents feel they have less of a role in campus-level endowment management than they have for the UC-level endowment and pension.
You can hear the meeting at the link below. Audio quality varies. In some cases, the live-stream seemed to freeze and had to be restarted. Hence, some brief audio is missing. The audio below has been edited to shorten the silent periods during which the audio was lost.