BY JENNIFER GOLLAN, ERICA PEREZ AND LANCE WILLIAMS
The Center for Investigative Reporting
The University of California’s $11.2 billion endowment has produced the worst investment returns of the 10 richest colleges in the country over the past decade, an analysis by The Center for Investigative Reporting shows.
From the 2004 through 2013 fiscal years, the university earned an average of 7.3 percent on the combined endowment of the system and individual campuses, while the other nine colleges with the largest endowment funds – which include the public University of Michigan and University of Texas – averaged 10 percent.
In 2013, the UC endowment’s return improved dramatically. But better performance over the previous nine years would have meant tens of millions of dollars a year to spend during a decade when the state’s premier public university system saw massive cuts in state funding.
Thousands of employees in the 10-campus system lost their jobs and students felt the pain acutely, as their education costs more than doubled.
“It’s very disappointing and disgraceful that the university isn’t managing its money better,” said Kareem Aref, a UC Riverside junior and president of the University of California Student Association. “Students are being priced out of the university right now.”
Over the past decade, Yale and Columbia universities earned the highest returns, tied at 11 percent. Stanford University earned 9.9 percent. If the University of California had done as well as the top-ranked institutions, it would have earned an additional $5.4 billion over the decade.
UC Chief Financial Officer Peter Taylor told CIR that the University of California has to invest more conservatively than its peers because it is a public institution.
“Would I have liked to have earned 10 percent a year… ? Absolutely. Sure,” he said. “But how risky should a public university be?”
In recent years, Taylor noted, the university has become less conservative and performance has improved. As the market rebounded during the last fiscal year, the university system earned 12.2 percent, second to Yale University among the 10 largest endowments.
The UC system’s investment performance has drawn criticism in recent years. From 2006 until her retirement last summer, Chief Investment Officer Marie Berggren was in charge of managing much of the university’s endowment.
The issue flared during one particularly heated teleconference last February, when T. Gary Rogers, the former CEO of Dreyer’s Grand Ice Cream and a longtime UC benefactor, complained that the university had the nation’s worst-performing large endowment fund.
“As I’ve been saying for some time now… I think it’s irresponsible for us to continue to ignore this absolutely bottom-of-the-heap performance year in and year out,” Rogers said.
A video shows Berggren thumbing through documents as Rogers spoke. She did not respond. Several regents downplayed Rogers’ concerns.
“It has never been quite as crystal clear as Gary is making it look right now,” said Regent Paul Wachter, financial adviser to former Gov. Arnold Schwarzenegger and now chairman of the Board of Regents’ Investments Committee.
Berggren didn’t respond to requests for comment on CIR’s findings.
Three times in the last decade – in 2008, 2009 and 2012 – the University of California lost money. During bull markets in 2005 and 2006, when the stock market surged, UC’s rate of return was at least 10 percentage points lower than that of Yale.
As state revenues plummeted in the recession, the Legislature between 2008 and 2012 slashed its annual appropriation to the university system by $900 million, or more than 25 percent. About 4,200 employees were laid off, 9,000 job openings remained unfilled and students faced tuition increase after tuition increase.
If the endowment had matched the returns of an average performer in the CIR analysis, the university system would have increased its endowment by an additional $3.2 billion over 10 years. The university spends roughly 5 percent of the endowment’s value each year, UC records show, so average investment performance could have supplied a windfall of about $682 million.
The endowment is a nest egg. Generally, investment earnings, rather than the principal, are spent on university needs, providing an especially critical source of funding in lean budget times.
More than half of the UC endowment – a total of $11.2 billion as of June – is supervised by the regents and managed by the chief investment officer. Investment officers on individual campuses manage the rest.
The University of California’s endowment is held in a mix of stocks, bonds, real estate and other investments. Investment decisions are made by financial professionals, including four consultants, 240 outside money managers and 53 university staff members.
For years, UC officials have been aware of the endowment’s lackluster performance, minutes of the regents’ investment committee show.
In those meetings, Berggren acknowledged that UC had missed an opportunity by investing too late in alternative investments such as private equity and venture capital funds.
Berggren argued that the university’s investments still did reasonably well, especially when compared with a list of peer institutions provided by a consulting firm. The peer list includes universities with endowment values of $1 billion or more, including much smaller institutions like 1,500-student Swarthmore College, a private liberal arts college.
The regents seemed satisfied with Berggren’s performance. Her base pay was $470,000 per year. And she received bonuses, including more than $700,000 during the 2012 fiscal year – when the endowment lost money.
James Ryans, a financial expert who analyzed the university’s endowment for CIR, said a big investment in hedge funds had been a drag on performance. In top-performing university endowments, investments in private equity paid off handsomely, said Ryans, a chartered financial analyst and doctoral candidate at UC Berkeley’s Haas School of Business.
Another difference he noted: The top-performing university endowments’ outside money managers “achieved benchmark-beating results.” In general, UC’s money managers didn’t seem to beat the university’s peer benchmarks by a significant margin, he said.
“Was it the investment selection process? The quality of managers they had access to?” he asked. “We don’t have access to enough information to say for sure.”
Assemblyman Das Williams, D-Santa Barbara, chairman of the Assembly Higher Education Committee, said he wants answers.
“I plan to ask UC hard questions about its investment income,” he said. “And if the answers aren’t satisfactory, I will consider calling for a hearing.”
On April 1, a new chief investment officer will take the reins for the UC system. Jagdeep S. Bachher, 41, is an executive vice president at Alberta Investment Management Corp., a Canadian firm that specializes in pensions and endowments.
In announcing the hiring, UC President Janet Napolitano cited Bachher’s “investment acumen.” His base pay will be $615,000 per year.
Charles Skorina of San Francisco, who recruits investment managers for endowments, said he’s optimistic about Bachher, though the regents ultimately will provide his marching orders.
“He comes from a big system that has performed well,” Skorina said. “If they want him to be more aggressive, he’ll be more aggressive. If they want him to be more conservative, he will be more conservative.”
This story was edited by Amy Pyle and copy edited by Nikki Frick and Christine Lee.
This story was produced by The Center for Investigative Reporting, an independent, nonprofit newsroom based in the San Francisco Bay Area. For more, visit cironline.org. Gollan can be reached at jgollan@cironline.org. Perez can be reached at eperez@cironine.org. Williams can be reached at lwilliams@cironline.org.
