Those who can, do. Those who can't, hire out.
That seems to be the message from the University of California's regents when it comes to picking stocks. They have decided that UC's in-house investment staff should no longer manage a big chunk of the system's $47.4 billion in pension and endowment assets.
The UC system disclosed Tuesday that it will hire outside money managers to handle $13.8 billion of domestic stock assets, taking those funds away from in-house staff.
Most major public pension funds rely at least in part on outside experts. By contrast, UC had long opted to go it alone. But the system's stock pickers didn't earn a passing grade: The staff-run U.S. stock portion of UC's employee retirement fund trailed market benchmarks in the 12 months, five years and 10 years ended June 30.
In the 10-year period, for example, the UC fund's stocks gained an average of 10.3% annually. That trailed the 11.6% average return of the fund's benchmarks, which had been the Standard & Poor's 500 and currently is a version of the broader Russell 3,000 index that excludes tobacco stocks (adopted as the target in June 2000).
"The decision was based on a lengthy review of the portfolios, on the basis that they have under-performed," said UC spokeswoman Abby Lunardini.
She said the funds have been under scrutiny for about 18 months, since David Russ became the system's treasurer. Russ had been an investment manager at the University of Texas and before that oversaw a portfolio for Pacific Telesis, now SBC Communications.
The UC shift also will mean diversifying from a large-stock strategy to a range of equity strategies, the treasurer's office said. The greater diversification and the use of multiple outside managers are aimed at limiting risk as well as improving performance, the office said.
For a public fund, managing money in house can be less expensive than contracting with outside managers. But any savings can be wiped out if the portfolio's performance is sub-par.
In UC's case, weak returns in the long run could limit the fund's ability to pay pension benefits or supply resources for the system's expansion.
Many other public pension funds, including the California Public Employees' Retirement System, have long used outside managers to handle at least a portion of assets. "We're kind of an anomaly," Lunardini said.
