______________________________________________________________________________
UNIVERSITY OF CALIFORNIA
RETIREMENT PLAN
INVESTMENT POLICY
STATEMENT
Approved May 12, 2016
Replaces version approved March 14, 2013
______________________________________________________________________________
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 2
TABLE OF CONTENTS
Section 1:
Investment Goals, Key Responsibilities, and Philosophy .......................................3
Section 2:
Investment Policies ..................................................................................................4
Section 3:
Fiduciary Oversight Procedures ...............................................................................6
Section 4:
Performance Objectives ...........................................................................................8
Appendix 1: Asset Allocation, Performance Benchmarks, and Rebalancing Policy .................10
Appendix 2: Risk Management Policy .......................................................................................15
Appendix 3: Funding Policy .......................................................................................................19
Appendix 4: Derivatives Policy ..................................................................................................20
Appendix 5: Proxy Voting Policy ...............................................................................................27
Appendix 6: Investment Manager Selection, Oversight, Review, and Termination ..................28
Appendix 7: Asset Class and Manager Investment Guidelines ..................................................30
7A) U.S. Equity Guidelines ......................................................................................................34
7B) Developed Market Non U.S. Equity Guidelines ................................................................37
7C) Emerging Market Non U.S. Equity Guidelines .................................................................40
7D) Global Equity Guidelines ...................................................................................................43
7E) Long Duration Fixed Income Guidelines ..........................................................................46
7F) Core Fixed Income Guidelines ..........................................................................................50
7G) TIPS Guidelines .................................................................................................................54
7H) Non-Dollar Denominated Fixed Income Guidelines .........................................................57
7I) High Yield Debt Guidelines...............................................................................................62
7J) Emerging Market Debt Guidelines ....................................................................................65
7K) STIP Guidelines .................................................................................................................70
7L) Private Equity Guidelines ..................................................................................................75
7M) Private Real Estate Guidelines ...........................................................................................77
7N) Public Real Estate Securities Guidelines ...........................................................................80
7O) Absolute Return Strategies Guidelines ..............................................................................82
7P) Real Assets Investment Guidelines ....................................................................................84
7Q) Limits on the Size of Investments with Public Equity and Fixed Income Managers ........86
Appendix 8: Definitions..............................................................................................................87
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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INTRODUCTION AND PURPOSE
This Investment Policy Statement (“Policy” or “IPS”) provides the framework for the
management of the investments of the University of California Retirement Plan (“UCRP” or the
“Plan”). The purpose of a policy statement is to document the investment management process
by:
Identifying the key roles and responsibilities relating to the ongoing management of the
Plan’s assets;
o
Recognize and ameliorate the agency issues among the parties responsible for
various aspects of investment management;
Setting forth an investment structure for the Plan’s assets;
o
This structure includes various asset classes and acceptable ranges that, in
aggregate, are expected to produce a sufficient investment return over the long
term while prudently managing risk.
o
This strategy should provide guidance in all market environments, and should be
based on a clear understanding of worst case outcomes.
Establishing formalized criteria to measure, monitor, and evaluate Plan performance
results on a regular basis; and
Encouraging effective communication among all fiduciaries, including external parties
engaged to execute investment strategies.
The document is divided into four sections. There are also a number of Appendices, which are
integral parts of this document.
1. Investment Goals, Key Responsibilities, and Philosophy
The investment
goals
state the mission of the Plan and its investment program.
a.
The mission of the Plan is to provide retirement benefits, as described in the Plan
document, to its participants and their beneficiaries.
b.
The overall investment goal of the Plan is to maximize the probability of meeting the
Plan’s liabilities subject to The Regents’ funding policy. Other goals include:
To maintain the ability to pay all benefits and obligations when due
To maintain flexibility in determining the future level of contributions
To maximize return within reasonable and prudent levels of risk
To preserve the real (i.e. inflation adjusted) purchasing power of assets
Key
responsibilities
in the oversight and management of the Plan are as follows:
a.
Under Section 11.02 of the Plan, as adopted by the Board of Regents of the University of
California (“The Regents”), The Regents is the designated trustee of the assets of the
Plan, which are held in the University of California Retirement Fund (“Retirement
Fund”). As trustee, The Regents has full responsibility for investment of the Retirement
Fund’s assets.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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b.
Under the authority granted in University Bylaw Sections 10.1.b and 12.5.a, The Regents
has appointed a standing Committee on Investments (“Committee”), which is charged
with oversight responsibility for the management of investments on behalf of The
Regents, which includes the establishment of investment policies for the Plan and
oversight of the management of the Plan’s assets.
c.
Under the Bylaw Section 12.5.c, the Committee is directed to establish a system of
custodianship for all securities.
d.
Under University Bylaw Section 21.4, The Regents has delegated to the Chief Investment
Officer general responsibility for all investment matters, including the implementation of
investment policies established by the Committee for the Retirement Fund. References to
the “Chief Investment Officer” below shall be understood, depending on the context, to
mean the “Office of the Chief Investment Officer.”
e.
Under the UC Retirement Plan Summary Plan Description, The Regents will authorize
periodic contributions to the Retirement Fund as necessary, to “maintain the Plan on an
actuarially sound basis.” The Regents policy for funding the Plan is found in Appendix 3.
The
philosophy
for the management of the Retirement Fund assets is as follows.
a.
The investment philosophy of the Committee is to create a management process with
sufficient flexibility to capture investment opportunities as they may occur, yet maintain
reasonable parameters to ensure prudence and care in the execution of the investment
program.
b.
The Committee seeks a return on investment consistent with levels of investment risk that
are prudent and reasonable given medium- to long-term capital market conditions and the
investment objectives of the Plan. (See part 4 below.) While the Committee recognizes
the importance of the preservation of capital, it also recognizes that to achieve the Plan’s
investment objectives requires prudent risk-taking, and that risk is the prerequisite for
generating excess investment returns. Therefore the Committee’s policy regarding
investment risk, consistent with modern portfolio theory, is that risk cannot be eliminated
but should be managed, and that fiduciaries have the obligation to utilize risk efficiently.
Risk exposures should be identified, measured, monitored, and tied to responsible parties;
and risk should be taken consistent with expectations for return. Further articulation of
the Committee’s risk policy, including appropriate budgets and ranges for various types
of risk, are found in Appendix 2.
2. Investment Policies
The policies of the investment program establish the investment strategy and guide its
implementation.
a.
The investment policies of the Retirement Fund shall be based on a financial plan that
will consider:
i.
The financial condition of the Plan, i.e., the relationship between the current and
projected assets of the Plan and the projected benefit payments, and the current
Funding Policy. (See Appendix 3.)
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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ii.
Future growth of active and retired participants; expected service costs and
benefit payments; and inflation and the rate of salary increases. (Together these
are the principal factors determining liability growth.)
iii.
The expected long-term capital market outlook, including expected volatility of
and correlation among various asset classes.
iv.
The range of possible investment outcomes associated with different policies.
v.
The Committee’s risk tolerance, that is, the trade-off between the desire to
achieve high returns (and the associated high volatility) and the desire to avoid
unacceptable outcomes (and the associated necessity for reduced returns).
b.
The Committee will consider alternative investment policies and will measure their
potential impact on the financial condition of the Plan and assess their suitability in
meeting the objectives of the Plan.
c.
The Committee’s financial plan will result in a risk budget, that is, an expected amount of
volatility associated with a given expected level of investment returns offered by the
capital markets including the expected active return.
d.
Based on the risk budget, the Committee, with input from the Chief Investment Officer
and other consultants, will approve a specific allocation of the investments (the asset
allocation policy) among the various asset classes considered prudent given the Plan’s
liability structure, and considering multiple measures of investment and surplus risk. The
asset allocation policy shall be expressed in terms of a normal percentage allocation and
ranges for each asset class. These normal weights and ranges are found in Appendix 1.
Criteria for including an asset class in the strategic allocation are also in Appendix 1.
e.
The asset allocation policy shall be sufficiently diversified to enable the appropriate
fiduciary to manage risk without imprudently sacrificing return. The Chief Investment
Officer is delegated the responsibility of managing total and active risk within the ranges
set by the Committee. (See Appendices 1 and 2.) Within the limits of prudent
diversification and established risk budgets, capital market and active risk exposures are
fungible, and the Chief Investment Officer may allocate risk exposures within and
between asset classes in order to optimize return. When necessary, the Chief Investment
Officer may use appropriate risk management strategies to protect portfolio value.
f.
The Committee will approve performance benchmarks for each asset class, based on a
pre-approved set of criteria, which are found in Appendix 1, and will approve overall
investment guidelines for each asset class, which are found in Appendix 7.
g.
The Plan’s assets shall at all times avoid the use of economic leverage (subject to
exceptions below). Economic leverage, in the context of portfolio management, is
defined as a net dollar exposure to assets in excess of the dollar amount of invested
capital, as measured by current market value. The term “net dollar exposure” is defined
in the Derivatives Policy, Appendix 4. A very small, inadvertent, or temporary violation
of this restriction that may occur in the normal course of portfolio management shall
not
be construed as leverage. Notwithstanding the general prohibition against leverage,
leverage may be used in Private Equity, Real Estate, Real Assets, and Absolute Return
strategies, per the limits and guidelines set forth in Appendix 7 and in the conduct of the
Securities Lending Program. (See Section 2l below.). All leverage shall be non-recourse
to The Regents, as trustee of UCRP, with respect to UCRP investments.
h.
The Chief Investment Officer will implement the asset allocation policy as approved by
the Committee. The Chief Investment Officer will select investment professionals
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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(“managers”) with demonstrated experience and expertise who will be responsible for
managing specific portfolios consistent with the Guidelines in Appendices 6 and 7. Each
investment manager will function under a formal contract that delineates its
responsibilities, investment style and process, performance expectations, administrative
requirements, and compensation. Where appropriate, each manager’s contract will
include a benchmark and range of probable outcomes relative to that benchmark. The
Chief Investment Officer shall establish and implement procedures for the selection,
monitoring, evaluation, and termination of investment managers, which are found in
Appendix 6.
i.
The Chief Investment Officer will allocate funds across managers to develop an efficient
investment structure, within the constraints of the prudence requirement, for each asset
class, and will monitor whether the aggregate characteristics of all portfolios in an asset
class comply with the investment guidelines for that class. The Chief Investment Officer
will determine a policy allocation for each manager to be used in the evaluation of the
active management program.
j.
The Chief Investment Officer shall establish and implement procedures to provide
efficient management of liquidity (including timely payment of benefits) for the Plan.
k.
The Chief Investment Officer shall be responsible for administering the investments of
the Retirement Fund at the lowest possible cost, being careful to avoid sacrificing quality.
These costs include, but are not limited to, management and custodial fees, consulting
fees, transaction costs and other administrative costs chargeable to the Retirement Fund.
The Chief Investment Officer may establish directed brokerage arrangements with the
custodian for the Retirement Fund or other qualified third parties in order to reduce
overall commissions cost for the Retirement Fund.
l.
The Chief Investment Officer may participate in securities lending programs, as a means
to augment income, with the custodian or other qualified third parties. Cash collateral
received from borrowers will be invested by the Chief Investment Officer or the lending
agent, in a short-term investment pool, in accordance with guidelines established by the
Chief Investment Officer.
m.
The Committee considers the active voting of proxies an integral part of the investment
process. Proxy voting will occur in accordance with the Proxy Voting Policy found in
Appendix 5.
n.
The investment program shall comply with existing and future applicable state and
federal laws and regulations and the prudence requirement.
o.
All transactions undertaken on behalf of the Retirement Fund will be undertaken solely in
the interests of Plan participants and their beneficiaries.
3. Fiduciary Oversight Procedures
The procedures for the management of the Retirement Fund’s assets outline the specific
responsibilities of the Committee and other fiduciaries.
a.
The Committee, in developing the investment policy for the Retirement Fund assets, shall
act with the care, skill, prudence, and diligence under the circumstances then prevailing
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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that a prudent person acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like aims.
b.
The Committee will exercise its fiduciary responsibilities in regard to the investment
program in accordance with the provisions of the Plan document and University Bylaws.
c.
The Committee shall review the asset allocation policy, asset class guidelines, and current
capital market assumptions at least annually to ensure that the current asset mix can
reasonably be expected to achieve the long-term goals of the Plan.
d.
The Committee will review the Plan’s updated actuarial valuation and financial
projection annually, including the recommended Funding Policy for each year.
e.
The Committee may appoint investment consultants to review investment performance of
the Retirement Fund in whole or with respect to specific asset classes, to assist in the
development of the Retirement Fund’s investment policies and asset allocation, to
monitor and report on investment risks, and to provide independent assessment of
investments proposed by the Chief Investment Officer.
f.
The Investment Advisory Group shall function in an oversight and evaluative role
providing advice to The Regents with respect to establishment of investment policies and
investment performance, including, but not limited to, investment strategies, policies and
procedures; investment performance; investment personnel of the Chief Investment
Officer; external investment managers; and the budget of the Chief Investment Officer.
The Committee on Investments has authority under Regents Bylaw 12.5 for management
of investments of the Corporation, and the Advisory Group shall have no management or
action authority. In addition, the Investment Advisory Group shall have no authority for
selection of specific investments, including the selection of investment managers or
individual investments.
g.
The Committee shall review the investments of the Retirement Fund no less than
quarterly to assess whether policy guidelines continue to be appropriate and are met. The
Committee shall monitor investment risk, as well as monitor investment returns on an
absolute and benchmark relative basis.
h.
The Chief Investment Officer shall prepare quarterly and annual reports for the
Committee and The Regents on the investment program, including
i.
The achievement of overall performance objectives
ii.
The type and amount of risk taken to achieve those objectives
iii.
Attribution of returns to various investment decisions and risks
iv.
Adherence to budgets set for total and active risk
v.
Compliance with policy guidelines, particularly asset allocation policy, and
vi.
The costs of managing the Retirement Fund’s assets.
i.
Investment performance results shall be calculated and verified at least monthly by an
external, independent performance consultant.
j.
The Chief Investment Officer, in conjunction with the various investment consultants,
will monitor the investment managers for compliance with their investment guidelines,
achievement of specific objectives, and individual risk exposures.
k.
The Chief Investment Officer shall monitor the conduct of the custodian of the
Retirement Fund.
l.
The Chief Investment Officer shall adopt the CFA Institute Code of Ethics and Standards
of Professional Conduct for all employees of the Chief Investment Officer and relevant
consultants and managers. These are found at
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n6.1
and incorporated by reference.
The Chief Investment Officer shall develop and enforce other ethics guidelines for the
Office of the Chief Investment Officer as needed, consistent with other University
policies and guidelines.
m.
The Committee will review this Policy from time to time to determine if modifications
are necessary or desirable.
4. Performance Objectives
Performance objectives shall be established for the total Retirement Fund, asset class composites
and individual manager portfolios. These objectives will be incorporated in the quarterly
reviews of the Retirement Fund’s performance.
The investment strategy articulated in the asset allocation policy found in Appendix 1 has been
developed in the context of long-term capital market expectations, as well as multi-year
projections of actuarial liabilities. Accordingly, the investment objectives and strategies
emphasize a long-term outlook, and interim performance fluctuations will be viewed with the
corresponding perspective. The Committee acknowledges that over short time periods (i.e. one
quarter, one year, and even three to five year time periods), returns will vary from performance
objectives and the investment policy thus serves as a buffer against ill-considered action.
There are three principal factors that affect a pension fund’s financial status: 1) contributions,
2) benefit payments, and 3) investment performance. Only the last factor is dependent upon the
investment policy and guidelines contained herein. However, the Committee’s level of risk
tolerance will take into account all three factors. At certain levels of funded status, it could be
impossible for the investments to achieve the necessary performance to meet the promised
liabilities. The result is that either benefits have to be reduced, contributions increased, or risk
tolerance changed.
Rates of return will be calculated based on a time-weighted rate of return formula as
recommended by the CFA Institute. Returns will be calculated by the custodian and will be
reported net of all fees and costs.
The performance of the overall Retirement Fund will be measured relative to:
Actuarial rate of interest
Funded status
Inflation
Policy benchmarks
a.
The Retirement Fund total return objective should be at least equal to the Plan’s actuarial
rate of return on a consistent basis over time.
This objective is to achieve a rate of return equal to or greater than the Plan’s
actuarial interest rate. If the Plan’s assets grow at a rate equal to or greater than the
actuarial rate, the Plan’s funding condition will be maintained. Earning a lower
return will generally result in increased levels of contributions. (Maintaining the
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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Plan’s funded status is conditioned, in part, on the successful implementation of a
prudent funding policy.)
b.
Funded status should be in excess of 100%.
This objective is to maintain a status of full funding, meaning that the Plan’s assets
are at least as great as the Plan’s liabilities, both as measured by actuarially
acceptable methodologies. Full funding provides a higher level of assurance that all
promised benefits can be paid from existing assets and expected investment returns.
(The ability to maintain full funding is conditioned, in part, on the successful
implementation of a prudent funding policy.)
c.
Total Retirement Fund return should exceed the Consumer Price Index on a consistent
basis over time (e.g. rolling 3 and 5 years).
This objective is to achieve a positive return above inflation. The Plan’s liabilities are
sensitive to inflation, as benefits are partially determined by future salaries. Failing to
achieve the targeted real (i.e., purchasing power) return may also increase future
contributions.
d.
Total Retirement Fund return should match or exceed the total Retirement Fund weighted
policy benchmark return, net of all fees and expenses on a consistent basis over the long
term. See Appendix 1 for the composition and calculation of the Retirement Fund policy
weighted benchmark.
This objective is to match or exceed a passively managed fund with a similar asset
mix, net of all fees and expenses. The value added above the policy benchmark
measures the effectiveness of the Chief Investment Officer’s implementation and
management decisions.
Additional metrics with respect to risk are found in the Risk Policy Appendix 2.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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APPENDIX 1
This version: May 12, 2016
Replaces Version: April 1, 2013
ASSET ALLOCATION,
PERFORMANCE BENCHMARKS,
AND REBALANCING POLICY
Based on the risk budget for the Retirement Fund, the Committee has adopted the following asset
allocation policy, including asset class weights and ranges, benchmarks for each asset class, and
the benchmark for the total Retirement Fund.
Criteria for including an asset class in the strategic policy include:
Contributes positively to the investment objectives of UCRP
Widely recognized and accepted among institutional investors
Has low correlation with other accepted asset classes
Has a meaningful performance history
Involves a unique set of investors.
The allowable ranges for each asset class and in total have been chosen to be consistent with
budgets and ranges for total and active risk. (See Appendix 2.)
[This space intentionally left blank.]
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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A. Strategic Asset Allocation and Ranges
Target
Allocation
Allowable Ranges
Minimum
Maximum
Global Equity
50.0
40.0
60.0
US Fixed Income
13.0
10.0
16.0
High Yield Fixed Income
2.5
0.0
5.0
Emerging Mkt Fixed Income
2.5
0.0
5.0
TIPS
2.0
0.0
4.0
Private Equity
10.0
5.0
15.0
Absolute Return
10.0
0.0
20.0
Real Assets
3.0
0.0
6.0
Real Estate
7.0
2.0
12.0
Liquidity
0.0
0.0
10.0
TOTAL
100%
Combined Public Equity
50.0
40.0
60.0
Combined Fixed Income
20.0
10.0
30.0
Combined Other
Investments*
30.0
20.0
40.0
* Other Investments category including, but not limited to: Real Estate, Private Equity, Real
Assets, and Absolute Return
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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B. Asset Class Performance Benchmarks
The Committee has adopted the following performance benchmarks for each asset class. Criteria
for selection of a benchmark include:
Unambiguous: the names and weights of securities comprising the benchmark are clearly
delineated
Investable: is possible to replicate the benchmark performance by investing in the
benchmark holdings
Measurable: it is possible to readily calculate the benchmark’s return on a reasonably
frequent basis
Appropriate: the benchmark is consistent with the Committee’s investment preferences or
biases
Specified in Advance: the benchmark is constructed prior to the start of an evaluation
period
Reflects Current Investment Opinion: investment professionals in the asset class should
have views on the assets in the benchmark and incorporate those views in their portfolio
construction
Asset Class
Benchmark
Global Equity
MSCI All Country World Index Net – IMI – Tobacco Free
Fixed Income
Barclays US Aggregate Index
High Yield Fixed Income
Merrill Lynch High Yield Cash Pay Index
Emg Mkt Fixed Income
Dollar Denominated: JP Morgan Emerging Markets Bond Index
Global Diversified
TIPS
Barclays US TIPS Index
Private Equity
N/A (See below note 2.)
Absolute Return
HFRI Fund of Funds Composite
Real Assets
N/A (See below note 3.)
Real Estate
NCREIF Funds Index – Open End Diversified Core Equity
(ODCE), lagged 3 months
Notes on asset class benchmarks:
1. Global Equity: The Chief Investment Officer will determine what constitutes a tobacco
company based on standard industry classification of the major index providers (e.g., Russell,
MSCI) and communicate this list to investment managers annually and whenever changes occur.
2. Private Equity:
Long-term
portfolio returns will be compared to investable public equity
alternatives as well as non-investable peer group indices. There is no appropriate market
benchmark to use for
short-term
performance evaluation or decision making.
3. Real Assets (all strategies ex-commodities): similar to Private Equity.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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C. Total Retirement Fund Performance Benchmark
This is the composition of the total Fund performance benchmark referred to in the Investment
Policy Statement, Part 4(d). The percentages below add to 100%.
Percentage
Benchmark
50.0%
MSCI All Country World Index Net – IMI – Tobacco Free
13.0%
Barclays US Aggregate Index
2.5%
Merrill Lynch High Yield Cash Pay Index
2.5%
JP Morgan Emerging Market Bond Index Global Diversified
2.0%
Barclays US TIPS Index
10.0%
Actual return of private equity portfolio
10.0%
HFRI Funds of Funds Composite
3.0%
Aggregate Real Assets benchmark (see section B), with components weighted
by their actual weights within the total real assets portfolio
7.0%
NCREIF Funds Index – Open End Diversified Core Equity (ODCE), lagged 3
months
Notes on total fund benchmark:
1. The benchmark for private equity is replaced by the private equity portfolio’s actual
performance. This has the effect of neutralizing the active performance of this class for purposes
of total fund performance evaluation.
2. The calculation of the total fund benchmark will assume a monthly rebalancing methodology.
3. In the event of a significant change in asset allocation, The Chief Investment Officer in
consultation with the Committee may specify an alternative weighting scheme to be used during
a transition period.
D. Rebalancing Policy
There will be periodic deviations in actual asset weights from the long-term/current policy asset
weights specified above. Causes for periodic deviations are market movements, cash flows, and
varying portfolio performance. Significant movements from the asset class policy weights will
alter the intended expected return and risk of the Fund. Accordingly, the Investment Committee
authorizes the Chief Investment Officer to rebalance the Fund when necessary to ensure
adherence to the Investment Policy.
The Chief Investment Officer will monitor the actual asset allocation at least monthly. The
Committee directs the Chief Investment Officer to take all actions necessary, within the
requirement to act prudently, to rebalance assets to within the policy ranges in a timely and cost
effective manner when actual weights are outside the prescribed ranges. The Chief Investment
Officer may utilize derivative contracts (in accordance with Appendix 4) to rebalance the
portfolio such that the portfolio’s net exposures are consistent with policy ranges.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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The Chief Investment Officer shall assess and manage the trade-off between the cost of
rebalancing and the active risk associated with the deviation from policy asset weights. With
approval from the Chair of the Committee, the Chief Investment Officer may delay a rebalancing
program when the Chief Investment Officer believes the delay is in the best interest of the Plan.
Results of rebalancing will be reported to the Committee at quarterly meetings.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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APPENDIX 2
This version: May 12, 2016
RISK MANAGEMENT POLICY
RISK PHILOSOPHY
In its broadest sense, risk refers to the unpredictability of future asset value, and
specifically, the chance that assets may decrease, as well as increase, in value. Investment
principles and practical experience both support the notion that expected returns are proportional
to market risk taken. The Committee recognizes that the assumption of risk is necessary to meet
Plan objectives; that is, there are no “risk free” assets, which are sufficient to generate the Plan’s
required rate of return. (Even if future benefit payments were known with certainty [and they are
not
], and surplus risk could be eliminated by an appropriate mix of nominal and inflation
protected bonds, such a policy would result in unacceptably larger funding costs to the
University and to Plan participants). Thus Plan risk management does not require the
elimination of risk, but the balancing of risk and expected return. Risk in itself is intrinsically
neither good nor bad; it is a resource used to generate investment returns. The Committee
recognizes that “The essence of investment management is the management of risks, not the
management of returns.”
RISK POLICY
The Committee’s policy regarding investment risk, consistent with modern portfolio
theory, is that risk cannot be eliminated but should be managed. That is, plan fiduciaries are
responsible for understanding the risks in various investment strategies, ensuring that they are
properly compensated for these risks, and measuring and monitoring them continually. In
particular, the level of risk taken should be consistent with the return objectives of the Plan.
Fiduciaries set the framework for risk management through the investment policy and
guidelines, the strategic asset allocation, and the benchmarks used for performance objectives.
However, tolerance for risk (alternatively, aversion to risk) may also be expressed in the form of
various metrics for risk (volatility) and acceptable budgets and ranges for those metrics. Where
appropriate, the Committee shall define these metrics and budgets for risk and establish
acceptable ranges for them (see below).
The Chief Investment Officer is responsible for managing both total and active risk and
shall implement procedures and safeguards so that the combined risk exposures of all portfolios
in the aggregate are kept within limits established by the Committee. (See definitions below.)
Further, within limits of prudent diversification and risk budgets, total and active risk exposures
are fungible, that is the Chief Investment Officer may allocate risk exposures within and between
asset classes in order to optimize return.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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The
principal risks
that impact the Plan, and the parties responsible for managing them are as
follows:
a.
Capital market risk
is the risk that the investment returns (in excess of the risk-free rate)
associated with the Committee’s asset allocation policy are not sufficient to provide the
required actuarial return. Responsibility for determining the overall level of capital
market risk lies with the Committee.
b.
Investment style risk
is associated with an active management investment program. It is
the performance differential between an asset class’s market target and the aggregate of
the managers’ benchmarks within the asset class weighted according to a policy
allocation specified by the Chief Investment Officer. This risk is an implementation risk
and is the responsibility of the Chief Investment Officer.
c.
Manager value-added risk
is also associated with an active management investment
program. It is the performance differential between the aggregate of the managers’
actual (active) portfolios and the aggregate of the managers’ benchmarks, both at policy
allocation. This risk is an implementation risk and is the responsibility of the Chief
Investment Officer (and indirectly the investment managers retained by the Chief
Investment Officer).
d.
Tactical/strategic risk
is the performance differential between (1) policy allocations for
the Retirement Fund’s asset categories and its investment managers and (2) the actual
allocations. This risk is the responsibility of the Chief Investment Officer.
e.
Total active risk
refers to the volatility of the difference between the return of the
Retirement Fund policy benchmark (see Appendix 1) and the actual return. It
incorporates the aggregate of the risks in (b), (c) and (d) above, and is thus the
responsibility of the Chief Investment Officer.
f.
Total investment risk
refers to the volatility of the return of the total Retirement Fund
assets. It incorporates all elements of investment risk as enumerated above, and is thus
the joint responsibility of the Committee and the Chief Investment Officer.
g.
Surplus risk
refers to the volatility of the change in the dollar value of Retirement Fund
assets versus the change in the dollar value of the Plan’s liabilities. The latter represents
the ultimate investment objective of the Plan. Because the asset allocation articulates
the Committee’s risk tolerance, and because The Regents determines the Plan’s benefits
and liabilities, this risk is the joint responsibility of The Regents and the Committee.
h.
Peer risk
refers to the difference in Retirement Fund performance relative to peer
institutions. The Committee acknowledges that similar institutions may have different
liabilities and different levels of investment risk. Comparisons of performance with
other institutions are meaningful
only
after adjusting for differences in investment policy
and risk among peers. This risk is the responsibility of the Committee.
Although the management of investment portfolios may be outsourced, investment
oversight and risk management are primary fiduciary duties of the Committee that are delegated
to and performed by the Chief Investment Officer. The Chief Investment Officer shall report on
risk exposures and the values of the several risk measures to the Committee, either quarterly or
annually as required below.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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RISK METRICS AND BUDGETS
There are different types of risk important at each level of plan investment management
and thus different risk metrics are appropriate at each level.
Plan level
o
Surplus Risk (insufficient assets to meet liabilities)
o
Measures the risk of inappropriate investment policy and strategy
Asset class level
o
Total Investment Risk (volatility of total return)
o
Measures the risk of ineffective implementation of strategy
Portfolio level
o
Active Risk or “Tracking Error” (volatility of deviation from style or benchmark)
o
Measures the risk of unintended exposures or inadequate diversification
Surplus risk
There are several risk measures which focus on surplus risk. The Chief Investment Officer shall
report on these measures to the Committee periodically. However, no objective levels (budgets)
will be set for these metrics due to the separation of responsibility for investment management
and funding policy. Thus results will be presented for information and use in policy reviews.
o
Metric
: Funded Ratio, defined as the ratio of plan assets to liabilities. Plan assets
shall be measured at current market value as well as using actuarially smoothing.
Liabilities shall be measured as the actuarial accrued liability (AAL). Liabilities, and
hence this metric, are formally re-estimated only annually, but should be reviewed
quarterly (change in liabilities estimated using liability duration and change in bond
yields, as well as accruals for service cost and benefits paid).
o
Longer term measures of forecast surplus risk shall be presented annually, in
conjunction with asset liability and asset allocation reviews
The funded ratio projected over a ten year forecast period, using an actuarial
model of assets and liabilities
The expected shortfall, defined as the expected loss experienced in worst case
market scenarios
Retirement Fund Total Investment Risk
The basis for the risk budget at the total asset level is the Policy benchmark, or neutral position.
Thus the risk budget starts with the risk of the benchmark index. Assuming an expected benefit
from active management, the impact of deviations from the benchmark is added to the
benchmark risk to derive the total risk budget. The Chief Investment Officer shall report on this
metric to the Committee quarterly.
o
Metric
: Retirement Fund Total Investment Risk is defined as the annualized standard
deviation of the monthly plan returns, exponentially weighted over the previous
12 months. Benchmark Risk (i.e., the Capital Market risk of the strategic asset
allocation) is measured similarly (using returns on the policy benchmark).
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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o
Budget
: Retirement Fund Total Investment Risk shall be maintained at a level equal
to the square root
of the sum of the squares of Benchmark Risk and the Active Risk
budget (see below).
o
Range
: If Retirement Fund Total Investment Risk is greater (less) than 20% above
(below) the budgeted level at any quarterly measurement date, the Chief Investment
Officer will take appropriate steps to reduce (increase) total Retirement Fund risk to
its budget level, including but not limited to rebalancing asset class weights within
allowable ranges. (For example, if the risk budget is 12%, the allowable range is
+/- 2.4% [20% x 12%].)
Retirement Fund Active Risk
There is no neutral or natural budget for active risk. The budget for active risk is determined to
be consistent with the tolerance for active risk and the expectation to earn active return due to
market inefficiencies and/or investment skill. This budget for active risk includes all of the
following types of variation from policy:
1.
Temporary asset weights different from strategic policy, but within the allowed ranges
[Tactical/strategic risk]
2.
Aggregate manager benchmarks different than asset class benchmark [Investment style risk]
3.
Aggregate active manager risks [Manager value-added risk], including
o
Aggregate portfolio systematic exposures different from the benchmark
o
Aggregate portfolio security selection decisions
o
Aggregate portfolio currency exposures different from the benchmark
The Chief Investment Officer shall report on this metric to the Committee quarterly.
o
Metric
: Tracking Error is defined as annualized standard deviation of the difference
between monthly Retirement Fund returns and monthly policy benchmark returns,
exponentially weighted over the previous 12 months
o
Budge
t: Tracking Error budget shall be 3.0% annual standard deviation. It is
understood that this budget may change when there is a change in
asset allocation, or
risk tolerance
o
Range
: If Tracking Error is greater (less) than 1.0% (one percentage point) above the
budget level at any quarterly measurement date, the Chief Investment Officer will
take appropriate steps to reduce tracking error to its budget level, including but not
limited to rebalancing asset class and/or manager weights within allowable ranges.
Both Total Investment Risk and Active Risk for the Retirement Fund shall be computed without
the impact of Private Equity. For this calculation, it will be assumed that total fund performance
excludes Private Equity performance and the total fund benchmark has no Private Equity
component. Private Equity is the asset class defined in Appendix 7L.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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APPENDIX 3
FUNDING POLICY
The Regents’ funding policy for the Plan has been to establish annual contributions as a
percentage of payroll by using the Entry Age Normal actuarial funding method. In fiscal year
1990-91, The Regents adopted a full funding policy. Under this policy, The Regents suspends
contributions to the Plan when plan assets, defined as the smaller of
Market value, or
Actuarial value
exceed plan liabilities, defined as the lesser of
Actuarial accrued liability plus normal cost, or
150% of current liability plus normal cost.
This policy is consistent with Internal Revenue Code section 412. Also as part of this policy,
The Regents redirected employee contributions to the Plan to a mandatory Defined Contribution
Plan, according to the same formula as then existed.
There are three principal factors that affect a pension fund’s financial status: 1) contributions,
2) benefit payments, and 3) investment performance. Only the latter is dependent upon the
investment policy and guidelines contained herein. However, the Committee’s level of risk
tolerance will take into account all three factors. At certain levels of funded status, it could be
impossible for the investments to achieve the necessary performance to meet the promised
liabilities. The result is that either benefits have to be reduced, contributions increased or risk
tolerance changed.
Definitions:
1.
Actuarial value of assets: the value of investments belonging to a retirement plan, as used by
the actuary for the purpose of making contributions to the plan. Typically, the actuary
calculates a smoothed value to reduce the impact on contributions of market volatility.
2.
Market value of assets: the value of investments belonging to a retirement plan, valued at
current market prices in accordance with generally accepted accounting principles
3.
Actuarial accrued liability: the accumulated value of normal costs allocated to the years
before the valuation date (for both current employees, terminated employees with vested
benefits, and retirees)
4.
Current liability: the actuarial present value of accumulated plan benefits
5.
Normal cost: the portion of actuarial present value of plan benefits and expenses which is
allocated to the current year by the actuarial cost method
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 20
APPENDIX 4
This version: November 15, 2012
Last approved: February 14, 2006
DERIVATIVES POLICY
1.
INTRODUCTION
The purpose of the Derivatives Policy is to establish permitted (and prohibited) uses of
derivatives, to establish procedures for managing risks related to derivative securities, and for
monitoring and reporting of their use in the Fund.
2.
DEFINITION AND SCOPE
A derivative is a contract or security whose value is
derived
from another security or risk factor.
There are three fundamental
classes
of derivatives - futures, options and swaps - each with many
variations; in addition, some securities are
combinations
of derivatives or contain
embedded
derivatives.
This Policy covers only futures, options, swaps, and their combinations. It is applicable
to marketable equity and bond asset classes only, not to absolute return strategies, real estate, or
private equity. Securities with embedded option features, such as callable or convertible bonds,
or mortgaged backed securities, typically have different risks, and are discussed in the Fixed
Income Guidelines.
3.
DERIVATIVES POLICY
The Committee recognizes that all investing, including the use of derivatives, involves risk, and
that derivatives use is part of modern institutional portfolio management. The principal risk of
derivative strategies comes from the potential to lever a portfolio (i.e., to magnify risk exposures
using borrowed funds) or otherwise speculate (express views on a security or risk factor without
committing capital). Successful and prudent use of derivatives thus depends on
Well-defined uses for derivatives, and avoidance of economic leverage
Monitoring and measuring risk, and limits on economic exposures
Investment manager internal controls and defined procedures for managing risk
The following policies govern the use of derivative securities in the Fund:
1.
All derivative strategies are
prohibited unless specifically allowed in writing
as part of an
investment manager’s guidelines. In the latter case, those guidelines must be consistent with
the policies stated herein.
2.
Use of derivatives to create economic leverage is prohibited,
except for specific strategies
only
, as per the Investment Policy Statement of UCRP and GEP, Section 2g, on page 5.
3.
Permitted applications for derivatives are (a) efficient substitutes for physical securities, (b)
managing risk by hedging existing exposures, or (c) to implement arbitrage or other approved
active management strategies, and are detailed in the following section.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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4.
Although individual derivative securities may be considered risky or inappropriate as stand-
alone investments, their use in a portfolio may actually reduce or otherwise manage risk.
Therefore
the risk of derivatives – and their acceptability as investments - should be
measured by their impact on the portfolio in which they are used, not in isolation.
5.
The Chief Investment Officer shall implement procedures to ensure (a) that the purpose, use,
and risks of derivative strategies are well understood and consistent with overall investment
objectives and individual strategies, (b) that risks taken are prudent and maintained within
acceptable limits, (c) that expected return is commensurate with the risk taken, (d) that their
potential impact on the value of the Fund’s assets is measured periodically, and (e) that there
is compliance with this policy. (See below, section 8.)
4.
USE OF DERIVATIVES
The use of derivatives instruments and strategies will be allowed in three broad areas:
As efficient substitutes for physical securities for portfolio management , and during
portfolio rebalancing, asset allocation, or transition management
o
It is often possible to create the same economic exposure to an asset or asset class by
using derivatives as by purchasing the assets directly (in the “cash” or “spot”
markets), but with these advantages
Reduced transaction cost
Increased speed of execution
Reduced disruption to existing portfolio strategies
Better risk-reward trade-off than exists in the cash markets
To manage risk by hedging existing exposures
o
Hedging is the process of reducing the possibility for gain or loss over a specific
future period by taking an opposite position yet not altering the underlying portfolio
structure
To implement arbitrage strategies
o
Arbitrage is the simultaneous purchase and sale of similar securities in order to
capture a perceived pricing disparity between them
These acceptable uses are described in detail below (see sections 4A-C) in the context of specific
investment functions.
4A. PORTFOLIO REBALANCING, ASSET ALLOCATION AND TRANSITION
MANAGEMENT
Following are potential uses of derivatives, which
may
be permitted for use. This is a
representative, not an exhaustive list.
Maintaining exposure to an asset class or risk factor when large cash inflows or outflows
are expected (without changing the existing portfolios’ holding of physical securities). In
the case of equity portfolios, this is referred to as cash equitization, but the concept and
practice apply to any asset class for which derivatives exist.
Implementing an asset allocation efficiently prior to manager selection and/or before
funding is completed
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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Implementing a portfolio restructuring / rebalancing efficiently prior to manager selection
and/or before funding is completed
Implementing tactical asset allocation programs efficiently
Implementing “alpha transport” or “portable alpha” strategies (i.e., to separate capital
market exposures from the active management process and maintain a desired asset
allocation while optimizing the use of active risk) between distinct asset classes, such as
from (to) equity to (from) fixed income
Implementing a portfolio insurance strategy during a period of heightened market
volatility
4B. EQUITY PORTFOLIO MANAGEMENT
Following are potential uses of derivatives, which
may
be permitted for use. This is a
representative, not an exhaustive list.
Maintaining exposure to an asset class when large cash inflows or outflows are expected
(without changing the portfolio’s holding of physical securities)
Obtaining exposure to a sector, country, or asset class more efficiently or more cheaply
than is possible in the spot markets
Eliminating or reducing the performance “drag” of cash held to facilitate transactions by
purchasing ETF’s or futures
Return enhancement in a risk controlled framework (e.g., selling covered calls)
Hedging anticipated market moves (without changing a portfolio’s holding of physical
securities) using futures and/or options. Such hedging is limited to (a) offsetting existing
positions, or (b) offsetting anticipated near-term portfolio rebalancing.
Hedging foreign currency exposure using foreign exchange forwards, futures, or options.
Implementing long/short, market neutral, or other arbitrage strategies.
Implementing “alpha transport” or “portable alpha” strategies within an asset class or
across distinct equity asset classes
4C. FIXED INCOME PORTFOLIO MANAGEMENT
Following are potential uses of derivatives, which
may
be permitted for use. This is a
representative, not an exhaustive list.
Maintaining exposure to an asset class or risk factor when large cash inflows or outflows
are expected (without changing the portfolio’s holding of physical securities)
Modifying a portfolio’s duration or otherwise changing its exposure to various points
along the yield curve (without changing the portfolio’s holding of physical securities)
Maintaining a portfolio’s targeted yield curve exposure while making sector or security
selection decisions which would otherwise change it
Modifying a portfolio’s credit quality by creating a synthetic credit exposure or
neutralizing (hedging) a particular credit exposure
Obtaining exposure to a sector, country, or asset class more efficiently or more cheaply
than is possible in the spot markets
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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Facilitating arbitrage strategies, to exploit perceived relative value between securities,
subject to the fundamental policy prohibiting leverage stated above
Eliminating or reducing the performance “drag” of cash held to facilitate transactions by
purchasing futures
Enhancing return by substituting an exposure in the cash market with a similar derivative
exposure
Hedging anticipated market moves using futures and/or options.
Hedging foreign currency exposure using foreign exchange forwards, futures, or options.
Implementing “alpha transport” or “portable alpha” strategies within an asset class or
across distinct fixed income asset classes
5.
AUTHORITY TO USE DERIVATIVES
The Chief Investment Officer will determine whether the Fund’s investment managers may
employ particular permitted strategies. For each investment manager, after determining that the
purpose falls within this policy, and that the investment manager has adequate controls and
procedures to monitor and measure risk, that manager’s investment guidelines will be developed
or modified to permit use of those particular strategies.
The Chief Investment Officer will determine that the investment manager has, at a minimum,
A defined purpose for each derivatives strategy within the investment mandate, including
a thorough understanding of the proposed benefits and potential risks
Developed and implemented written policies for controlling market, counterparty credit,
liquidity, and basis risk
Ability to value the derivative instruments, and explain the frequency and source of
pricing
Adequate analytical tools to measure and control the risks of the derivatives and assess
their impact on the portfolio, on at least a daily basis
Procedures for periodically stress testing the projected returns of the derivative
instruments on both a stand-alone and portfolio basis. In addition, managers must
demonstrate awareness of and controls for model risk.
Adequate internal controls and organizational capabilities for monitoring and reporting
market and counterparty credit risk, and internal procedures for identifying and reversing
risks in excess of agreed upon limits
Adequate internal controls and organizational capabilities to account for and control
legal, settlement, and operational risk
Ability to demonstrate compliance with this policy and answer reasonable requests for
reporting derivative positions and their risk characteristics
Appropriate senior members of the Office of the Chief Investment Officer, including a senior
member of the Risk Management function, will conduct the necessary due diligence and make a
recommendation to the Chief Investment Officer concerning the scope of the derivative
strategies permitted and any required investment guidelines or amendment(s) to the manager’s
investment guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
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6. PERMITTED INSTRUMENTS
6A.
The following derivative types are permitted under this policy, subject to the conditions and
restrictions noted above.
This is a representative, not an exhaustive list. As markets evolve and
new derivative instruments and strategies are developed, the Chief Investment Officer and
Regents’ Investment Consultant may permit the use of additional derivative instruments or
strategies not listed herein, on a case-by-case basis, provided they are consistent with this Policy
and with the investment manager’s mandate and risk parameters.
Interest rate futures, commodity futures and equity index futures
Exchange traded funds (ETFs)
Foreign currency options, futures and forwards
Over-the-counter (OTC) options and options on futures
Swaps and swaptions
Inverse Floaters
Credit Default Swaps (CDS)
Structured Notes,
as long as
the structures are transparent and contain only types and
amounts of exposures permitted in these Policies.
6B. The following derivative strategies are not permitted
Derivative positions creating economic leverage in the portfolio context
Derivatives used for speculative purposes
7. LIMITATIONS, CONTROLS, AND RESTRICTIONS
(See Definitions, section 9.)
7A. Portfolio Rebalancing / Asset Allocation
Selling (writing) uncovered options is prohibited
Long futures positions must be backed by 100% cash or cash equivalents (i.e., leverage is
not permitted)
Short futures positions must be collateralized by a risk equivalent (long position) of
highly correlated physical securities.
7B.
Equity Portfolio Management
The net of long and short dollar exposures to assets or currencies, whether derived from
physical or derivative securities, must be less than or equal to the dollar market value of
the portfolio, except for very small, inadvertent, or temporary amounts that occur in the
normal course of portfolio management.
The gross dollar exposures of the portfolio from physical and derivative securities
(whether futures, options, or swaps), cannot exceed 300% of the market value of the
aggregate underlying portfolio, at all times.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 25
The Chief Investment Officer may impose further limits on the use of derivatives so that
derivative notional values are not only constrained by their contribution to portfolio risk
factors (such as beta, regional or industry exposure) but also with consideration to:
liquidity, counterparty credit risk, pricing transparency, and model risk. Thus derivative
use may be limited even if other portfolio risk limits are not breached.
7C. Foreign Exchange Transactions
Foreign exchange derivative contracts must have a maturity less than or equal to the
anticipated holding period of the underlying security.
7D. Fixed Income Portfolio Management
The net of long and short dollar exposures to assets or currencies, whether derived from
physical or derivative securities, must be less than or equal to the dollar market value of
the portfolio, except for very small, inadvertent, or temporary amounts that occur in the
normal course of portfolio management
The gross dollar exposures of the portfolio from physical and derivative securities
(whether futures, options, or swaps), cannot exceed 300% of the market value of the
aggregate underlying portfolio, at all times
The Chief Investment Officer may impose further limits on the use of derivatives so that
derivative notional values are not only constrained by their contribution to portfolio risk
factors (such as contribution to portfolio effective duration and spread duration) but also
with consideration to: liquidity, counterparty credit risk, pricing transparency, and model
risk. Thus derivative use may be limited even if other portfolio risk limits are not
breached.
8. MONITORING AND REPORTING
The Chief Investment Officer will implement procedures for periodic monitoring of
derivative strategies. Investment managers will be required to provide the following to the
Chief Investment Officer:
Month end position report of derivatives
o
Report will include impact on portfolio, using metrics determined by the Chief
Investment Officer
o
For fixed income managers only, report will include contribution to portfolio
effective duration and effective convexity
Quarterly statement of compliance with this policy
Quarterly strategy report, including economic exposure to each class of derivatives, their
use within the portfolio, performance characteristics, and risk controls employed.
Quarterly report on counterparty credit risk for OTC derivatives
When derivatives are used by the Chief Investment Officer for portfolio rebalancing or asset
allocation, the Operations and Trading functions will provide the following to the Chief
Investment Officer:
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 26
Daily position, exposure, and profit/loss (P/L) reports
The Chief Investment Officer’s risk management process for derivatives will include:
Monthly reconciliation of managers’ derivatives reports with custodian positions in
derivatives (for all managers who are permitted to use derivatives)
Monthly review of Managers’ use of derivatives relative to their own policies and with
their intended use of derivatives, and with this Policy
Monthly reports of risk model results (for fixed income managers only)
o
Contribution to effective duration and effective convexity, by portfolio, of
all
positions
o
Economic exposures and risk characteristics of derivatives designated in section
A above
o
Stress tests will be required for volatile classes of derivatives such as IOs, POs,
and Inverse Floaters
A monthly statement that all portfolios are in compliance with this policy, and a
description of any instances of non-compliance and their disposition
An annual report on potential model risk (for the risk model currently in use by the Chief
Investment Officer)
While the risk of an individual derivative security may be large, risk will be assessed in a
portfolio framework (i.e., how each portfolio responds to various market and interest rate
scenarios, with and without the derivatives).
9. DEFINITIONS
a.
Derivative: a bilateral contract or payment exchange agreement whose value derives from
the value of an underlying asset, reference rate, or index
b.
Investment Manager: term includes portfolio managers with a fiduciary responsibility for
a given investment mandate, whether directly employed by the Chief Investment Officer
or an external asset management firm
c.
Leverage: in the context of these guidelines means “economic leverage,” not “gross
leverage”
d.
Economic leverage: in the context of portfolio management, is defined as a net dollar
exposure to assets in excess of the dollar amount of invested capital as measured by
current market value
e.
Net dollar exposure (of a portfolio): the arithmetic sum of the dollar market values of all
long (positive) and short (negative) positions in securities, plus the notional value of
futures contracts, plus the dollar delta of options contracts
f.
Dollar delta (of an option): a measure of net dollar exposure of an option; defined to be
the option’s notional value times the option’s delta
g.
Gross dollar exposure is defined as the sum of the combined long exposures and the
absolute value of the short exposures, including all physical and derivative securities
positions
h.
Gross leverage: a term used to indicate that the gross dollar exposure of a portfolio
exceeds the net market value of the total portfolio
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 27
APPENDIX 5
This version: May 12, 2016
Last approved: November 15, 2012
PROXY VOTING POLICY
INTRODUCTION
It is part of the generally accepted standards of fiduciary care that proxy voting rights should be
duly exercised as a principle fiduciary duty. The purpose of this policy is to establish the
principles and process for the exercise of this duty. Voting rights are important to fiduciary
responsibility as a means to promote good corporate governance that aligns with the University’s
interests and goals as a long-term investor. The Office of the Chief Investment Officer believes
that prudent exercise of voting rights promotes long-term shareholder value. The duty of
prudence includes considerations based on financial criteria, as well as prudent governance,
social, and environmental practices.
PROXY VOTING POLICY
The voting guidelines of our elected proxy voting advisor(s) and/or our investment managers
reflect viewpoints with respect to essential elements of good governance such as transparency,
board alignment with shareholder interests, shareholder rights, and business ethics. In general,
we vote according to the proxy voting guidelines developed by our elected proxy voting
advisor(s) or our investment managers.
Typically, but with certain exceptions:
proxy issues that are of a routine business management nature, such as election of
directors and appointment of auditors, are voted in accordance with the recommendations
of management;
environmental, social or governance (ESG) proxy issues are voted in accordance with our
sustainable investment framework (“Sustainability Impacts Investing” available at the
following link: http://www.ucop.edu/investment-office/_files/sustainable-investment-
framework.pdf).
Our elected proxy voting advisor(s) and/or investment managers who manage the voting process
on our behalf will provide a written summary of all proxy votes on all fund assets on an annual
basis.
Our elected proxy voting advisor(s) will provide each year a written summary of changes to its
voting guidelines for the ensuing year. The Office of the Chief Investment Officer will inform
the elected proxy voting advisor(s) and/or its investment managers where specific guidelines
deviate from the priorities of the Office of the Chief Investment Officer and will work with the
proxy voting advisor(s) and/or investment managers to reconcile these differences as
practicable/possible.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 28
APPENDIX 6
This version: November 15, 2012
Last approved: August 16, 2005
INVESTMENT MANAGER SELECTION,
OVERSIGHT, REVIEW, AND TERMINATION
When selecting investment managers, the Chief Investment Officer will:
Follow a due-diligence process to make prudent selections of investment managers. The
due-diligence process will involve analyzing investment manager candidates in terms of
certain:
o
Qualitative Characteristics
, such as key personnel, investment philosophy,
investment strategy, research orientation, decision-making process, and risk controls.
o
Quantitative Characteristics
, such as CFA Institute-compliant composite return
data, risk-adjusted rates of return (e.g., information ratios), and other risk factors.
o
Organizational Factors,
such as type and size of firm, ownership structure, client-
servicing capabilities, record of gaining and keeping clients, and fees.
Other factors will be considered as part of the due-diligence process as facts and
circumstances warrant.
Use third-party database(s) to access appropriate screening information and ensure an
unbiased and objective search process.
With respect to qualified retirement plans, select only entities that meet the definition of
“investment manager” under Section 3(38) of ERISA (a bank, insurance company, or
investment adviser registered under the Investment Advisers Act of 1940).
A key aspect of a prudent investment program is the designation of a performance benchmark for
each investment manager. This benchmark should be specified in writing, and should satisfy the
same set of quality criteria as stated for asset class benchmarks in Appendix 1, section B. In
addition, the benchmark for an actively managed portfolio should also satisfy the criteria of
Ownership: the investment manager should be aware of and accept accountability for the
constituents and performance of the benchmark. It is encouraged that the benchmark be
embedded in and integral to the investment process and procedures of the investment manager.
Investment managers will provide to the Chief Investment Officer the following:
A monthly performance statement for the portfolio (gross and net) and the benchmark.
Also include the gross performance for the product Composite at least quarterly
If available, a monthly or quarterly forecast risk report, using the investment manager’s
risk system, showing the total, systematic (“common factor”), and non-systematic
(“residual”) risk of the portfolio relative to the benchmark
A monthly or quarterly variance analysis, indicating sources of performance variances
(difference between portfolio and benchmark return), and an explanation of any material
differences
A quarterly review of portfolio and strategy performance including a market outlook
An annual statement of compliance with investment guidelines
Any other items specified by the appropriate guidelines under the Policy
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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In order to ensure that thorough and consistent manager oversight is carried out on a regular
basis, it is the intent of the Chief Investment Officer to meet with each investment manager once
each calendar year, and no less than once every eighteen months. In addition to the investment
performance review listed above, several other issues will be reviewed. These include brokerage
commissions, account turnover, personnel turnover, client service issues, investment guideline
compliance and changes in ownership.
The Committee acknowledges that, from time to time, it may be necessary to replace an existing
investment manager. Consequently, the following guidelines will govern review and/or
termination of investment managers because of qualitative, quantitative, or organizational
concerns.
At each quarterly performance evaluation, the Chief Investment Officer will initiate an inquiry
should any investment manager not meet the established performance objectives, including:
Significantly underperform the previously agreed-upon benchmark over the cumulative
performance period, with proper adjustment for the manager’s active risk.
Additionally, the Chief Investment Officer will initiate an inquiry should any investment
manager:
Undergo significant organizational changes, including departure of key investment
professionals;
Implement significant change in strategy;
Be involved in material litigation;
Be involved in an SEC or other securities investigation;
Be acquired by or acquire another firm.
After reviewing the appropriate qualitative and quantitative information, the Chief Investment
Officer may deem it appropriate to terminate, place the investment manager on notice, or to take
no action at that time. In cases in which the manager is placed on notice, the manager will be
informed of this decision in writing. The manager may be removed from this status upon
exhibiting significant organizational and/or performance changes.
Should the investment manager fail to exhibit the desired changes, the Chief Investment Officer
will conduct further discussions and analysis to determine if termination is warranted. While a
systematic process will be carried out in such instances, the decision to retain or terminate a
manager will not be made by a formula and will be made at the discretion of the Chief
Investment Officer. It is a judgment that depends on the Chief Investment Officer’s confidence
in the investment firm to perform in the future.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 30
APPENDIX 7
This version: May 12, 2016
ASSET CLASS AND MANAGER
INVESTMENT GUIDELINES
The general guidelines that apply to all investment managers are:
a.
Subject to constraints and restrictions imposed by the manager guidelines, all decisions
regarding sector and security selection, portfolio construction, and timing of purchases
and sales are delegated to the investment manager.
b.
The purchase of securities issued by tobacco companies is prohibited in separately
managed accounts. The Regents have defined a tobacco company as “a company which
derives its revenues from the manufacture and distribution of tobacco products or, if a
diversified company, that no other business line contributes more revenues or earnings
than tobacco products.” The Chief Investment Officer will determine what constitutes a
tobacco company based on standard industry classification of the major index providers
(e.g., Russell, MSCI) and communicate this list to investment managers annually and
whenever changes occur. The Committee recognizes that the establishment of social
investing restrictions limits investment opportunities and should be accompanied by
adjusting performance evaluation standards appropriately.
c.
The direct purchase of property owned or a security issued by the University, its
subsidiaries and affiliates, is prohibited
d.
The purchase of non-negotiable securities is prohibited in the equity and fixed income
asset classes.
e.
The use of derivative securities or contracts to create economic leverage in the portfolio
is prohibited. Acceptable and prohibited uses of derivatives are found in the derivatives
policy in Appendix 4.
f.
Transactions that involve a broker acting as a "principal," where such broker or an
affiliate is also the investment manager, who is making the transaction, are prohibited.
g.
Transactions shall be executed at the lowest possible total cost, which includes
commissions, efficiency of execution, and market impact.
h.
Any investment or action with respect to an investment not expressly allowed is
prohibited, unless presented to and approved prospectively by the Committee. All
guidelines must be adhered to; however, if from time to time a manager shall deem an
exception to the guidelines appropriate, the Chief Investment Officer shall seek review
and approval by the Committee to make such an exception.
Managers are required to inform the Chief Investment Officer of significant matters pertaining to
the investment of Retirement Fund assets, including at a minimum, substantive changes in
investment strategy and portfolio structure; significant changes in ownership, organizational
structure, financial condition, or professional staffing; litigation or violation of securities
regulations; significant account losses or growth of new business. Managers must inform the
Chief Investment Officer in the event of discovering an unintended or involuntary violation of
their guidelines or of any of the Policies herein pertaining to them.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 31
Managers are required to submit periodic reports to the Chief Investment Officer summarizing
investment activity and strategy, as per Appendices 6 and 7 and individual guidelines. Managers
are required to reconcile investment returns with the custodian each month.
Specific guidelines for each major asset class will be found in Appendix 7. Manager guidelines
will contain specific provisions to ensure that performance objectives and risk exposures are
consistent with their particular investment mandate, which may be a style or subset of their larger
asset class. However, all individual manager guidelines will be consistent with broad asset class
guidelines and this Policy.
Restrictions
The Managers may
not
Purchase securities of tobacco related companies, as per the Policy
Lend securities
Buy securities on margin, except for futures or swaps, against which are held a risk
equivalent amount of cash or liquid securities (Fixed Income)
Purchase equity securities (other than preferred stock) or commodities or their
derivatives (Fixed Income)
Purchase commodities or commodity derivatives
Purchase fixed income securities except for cash equivalents and margin requirements
as part of a portable alpha strategy (Public Equity)
Buy party-in-interest securities
Buy lettered, legend, or other restricted stock, except for 144A securities, which are
permitted
Employ economic leverage in the portfolio through borrowing or derivatives
Employ gross leverage in their portfolio in excess of 300% of the market value of the
portfolio, at all times
Other Constraints and Considerations
Managers shall comply with applicable State and Federal laws and regulations and
the prudence requirement described in section 3(a) of the Policy.
Managers shall act solely in the interests of the Fund’s constituents.
Implementation of this Program shall comply with the Fund’s Policy.
Managers shall employ best execution. Transactions may be directed to brokers/dealers
designated by the Chief Investment Officer at the Manager’s discretion when best execution is
available.
Managing Cash Flows
The Chief Investment Officer may use derivative contracts (including but not limited to index
futures and ETFs) for facilitating investment of cash flows related to contributions, withdrawals,
or other asset allocation rebalancing.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 32
Evaluation and Review
a.
Policy and Guideline Review
The Chief Investment Officer shall review the Objectives and Guidelines at least
annually, and report to the Committee on the impact of the Guidelines on the Program’s
performance.
b.
Program performance and risk exposures shall be evaluated at multiple levels in
accordance with the performance objectives of the Program and individual Managers.
Reporting
On a quarterly basis, the Chief Investment Officer shall provide the following reports to the
Committee:
a.
A performance attribution explaining differences in sector weights and returns, between
the aggregate Program investments and the Benchmark, and an explanation of any
material differences.
b.
A forecast risk report, using the Chief Investment Officer’s risk system, showing the
total, systematic (“common factor”), and non-systematic (“residual”) risk of the
aggregate portfolio, the Benchmark, and the active Program relative to the Benchmark,
and an explanation of any material differences.
c.
A summary of individual manager performance, on an absolute and benchmark relative
basis.
Managers will be required to provide the Chief Investment Officer monthly and quarterly
reports, including but not limited to:
a.
A monthly performance statement for the portfolio (gross and net) and the benchmark,
and provide the gross performance for the product Composite at least quarterly.
b.
If available, a monthly or quarterly forecast risk report, using the Manager’s risk system,
showing the total, systematic (“common factor”), and non-systematic (“residual”) risk of
the portfolio relative to the benchmark.
c.
A monthly or quarterly variance analysis, indicating sources of performance variances
(difference between portfolio and benchmark return), and an explanation of any material
differences.
d.
A quarterly review of portfolio and strategy performance including a market outlook.
e.
An annual statement of compliance with investment guidelines.
Definitions: See Appendix 8
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 33
Asset Class Guidelines
o
7A)
U.S. Equity Guidelines
o
7B)
Developed Market Non US Equity Guidelines
o
7C)
Emerging Market Non US Equity Guidelines
o
7D)
Global Equity Guidelines
o
7E)
Long Duration Fixed Income Guidelines
o
7F)
Core Fixed Income Guidelines
o
7G)
TIPS (Treasury Inflation Protected Securities) Guidelines
o
7H)
Non-Dollar Denominated Fixed Income Guidelines
o
7I)
High Yield Debt Guidelines
o
7J)
Emerging Market Debt Guidelines
o
7K)
STIP Guidelines
o
7L)
Private Equity Guidelines
o
7M) Private Real Estate Guidelines
o
7N)
Public Real Estate Securities Guidelines
o
7O)
Absolute Return Strategies Guidelines
o
7P)
Real Assets Investment Guidelines
o
7Q)
Limits on the Size of Investments with Public Equity and Fixed Income Managers
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 34
APPENDIX 7A
This version: May 12, 2016
Last approved: November 15, 2012
U.S. EQUITY
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the U.S. Equity allocation of the Fund (“the Program”). These
Objectives and Guidelines shall be subject to ongoing review by the Committee. Capital market
conditions, changes in the investment industry, new financial instruments, or a change in the
Committee’s risk tolerance, are among factors to be considered in determining whether the
Guidelines shall be revised.
1. Investment Policy
a.
Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in common stocks of US companies which exceeds the return on the broad US
equity market, measured by the Russell 3000 Tobacco Free Index (“Benchmark”), while
maintaining risk similar to that of the Benchmark.
b.
Investment Strategy
The Program shall be implemented by hiring multiple external investment managers
(“Managers”). Each Manager’s strategy will focus on a subset of the broad equity market in
which the Manager is believed to have a competitive advantage in providing returns in excess of
its respective benchmark on a risk adjusted basis. The Chief Investment Officer will monitor
whether the aggregate of all externally managed portfolios adheres to these Guidelines, and in
particular achieves the overall performance and risk objectives stated below. In addition, each
Manager shall have written guidelines, which will detail its strategy, performance objectives,
permitted investments, and restrictions. The Chief Investment Officer will monitor each
Manager’s adherence to its respective guidelines. In no case may a Manager’s guidelines create
potential conflict with the Guidelines for the Program.
c.
Performance Objective
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, or style benchmark, which is appropriate to its individual strategy, and
specified in its guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 35
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be 250
basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
e. Other Constraints and Considerations
Managers shall comply with applicable State and Federal laws and regulations and the
prudence requirement described in section 3(a) of the Policy.
Managers shall act solely in the interest of the Fund’s constituents.
Implementation of this Program shall comply with the Fund’s Policy.
2. Investment Guidelines
a. Asset Allocation
It is expected that the Program will be fully invested in equity and equity-related
securities at all times. Any cash or held by Managers for the purpose of facilitating cash flows or
portfolio transactions will be swept daily by the custodian. The Chief Investment Officer or
designated overlay manager may equitize this cash using appropriate derivatives contracts.
b. Types of Securities
The Program will be invested in diversified portfolios of common stocks that are listed on
national securities exchanges. These common stocks shall be predominantly of companies
domiciled in the United States, or which derive the majority of their sales and earnings from the
United States. Managers may also invest in stocks that are traded over-the-counter and in other
equity-related securities and private placements as limited in their guidelines. Subject to
limitations in their guidelines, Managers may also obtain equity exposure through their own
specialty commingled funds.
Use of and limits on equity derivative securities by individual managers must be
specified in writing in their guidelines and must be consistent with the Derivatives Policy,
Appendix 4.
Nothing in these guidelines shall be construed to restrict the use of diversified global
equity strategies (consisting of equities of U.S. and Non-U.S. domiciled companies). The Chief
Investment Officer shall ensure that such strategies are consistent with both these guidelines and
the guidelines of the Non-U.S. Equity Program, and the Manager(s)’ guidelines will be
structured to ensure that performance and risk objectives for both equity classes are met.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 36
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk and
will exhibit portfolio risk characteristics similar to those of the Benchmark. The Chief
Investment Officer is responsible for managing aggregate risk exposures. The following
limitations apply:
The Program’s beta with respect to the benchmark will deviate from the benchmark and
typically range from 0.8-1.1, as measured over the most recent 12-month period.
Notwithstanding the overall diversification of the Program, the Chief Investment Officer
may set limits on any individual Manager’s tracking error and/or contribution to active
risk of the Program.
The aggregate holdings of any security may not exceed 7.5% of that security’s
outstanding shares.
No investment with any single manager can represent more than 20% of the total
Program’s assets. Passive (i.e., index replicating) managers are not subject to this
limitation.
It is expected that each Manager’s portfolio will be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting a Manager’s ability to out-perform its benchmark. That is, an individual
Manager’s portfolio may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 37
APPENDIX 7B
This version: May 12, 2016
Last approved: November 15, 2012
DEVELOPED MARKET NON U.S. EQUITY
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Developed Market Non U.S. Equity allocation of the Fund
(“the Program”). These Objectives and Guidelines shall be subject to ongoing review by the
Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1.
Investment Policy
a.
Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in common stocks of Non US domiciled, developed market companies which
exceeds the return of the MSCI World ex-US (Net Dividends) Tobacco Free Index
(“Benchmark”), while maintaining risk similar to that of the Benchmark. The Benchmark shall
be unhedged. (See part (e) below.)
b.
Investment Strategy
The Program shall be implemented by hiring multiple external investment managers
(“Managers”). Each Manager’s strategy will focus on a subset of the broad equity market in
which the Manager is believed to have a competitive advantage in providing returns in excess of
its respective benchmark on a risk adjusted basis. The Chief Investment Officer will monitor
whether the aggregate of all externally managed portfolios adheres to these Guidelines, and in
particular achieves the overall performance and risk objectives stated below. In addition, each
Manager shall have written guidelines, which will detail its strategy, performance objectives,
permitted investments, and restrictions. The Chief Investment Officer will monitor each
Manager’s adherence to its respective guidelines. In no case may a Manager’s guidelines create
potential conflict with the Guidelines for the Program.
c.
Performance Objective
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, or style benchmark, which is appropriate to its individual strategy, and
specified in its guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 38
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
300 basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
e.
Currency Risk
The Committee accepts that as a US dollar denominated investor, investing in Non US
developed markets equity implicitly involves currency risk. The Committee accepts this
additional risk or volatility as part of the asset class and has adopted an “unhedged” performance
benchmark. An unhedged benchmark is a benchmark in which the underlying securities’ returns
are translated from their local currency back to US dollars at each measurement date.
However, this general policy toward currency risk shall not prevent individual Managers
from fully or partially hedging or otherwise actively managing the currency risk in their
portfolios (subject to their individual guidelines). Nor shall it prevent the Chief Investment
Officer from employing currency overlay managers to manage the currency risk of the aggregate
portfolio.
The contribution to active risk resulting from the aggregate of active currency
management, whether by Managers or by the Chief Investment Officer’s overlay managers, shall
be included in the total tracking error and be subject to limitations above and to the Retirement
Fund’s overall risk budget as described in Appendix 2.
2.
Investment Guidelines
a.
Asset Allocation
It is expected that the Program will be fully invested in equity and equity related
securities at all times. Any cash held by Managers for the purpose of facilitating cash flows or
portfolio transactions will be swept daily by the custodian. The Chief Investment Officer or
designated overlay manager may equitize this cash using appropriate derivative contracts.
b.
Types of Securities
The Program will be invested in diversified portfolios of common stocks that are listed on
national securities exchanges. These common stocks shall be predominantly of developed
market companies domiciled outside the United States, or which derive the majority of their
sales and earnings from countries outside the United States. Managers may also invest in stocks
that are traded over-the-counter and in other equity-related securities and private placements as
limited in their guidelines. Subject to limitations in their guidelines, Managers may also obtain
equity exposure through their own specialty commingled funds.
Managers may use currency futures, forward contracts, or options to manage currency
risk and hedge existing equity exposures. Use of and limits on equity derivative securities by
individual managers must be specified in writing in their guidelines and must be consistent with
the Derivatives Policy, Appendix 4.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 39
Nothing in these guidelines shall be construed to restrict the use of diversified global
equity strategies (consisting of equities of U.S. and Non-U.S. domiciled companies). The Chief
Investment Officer shall ensure that such strategies are consistent with both these guidelines and
the guidelines of the U.S. equity Program, and the Manager(s)’ guidelines will be structured to
ensure that performance and risk objectives for both equity classes are met.
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk and
will exhibit portfolio risk characteristics similar to those of the Benchmark. The Chief
Investment Officer is responsible for managing aggregate risk exposures, including country
allocation, industry allocation, and currency. The following limitations apply:
The Program’s beta with respect to the benchmark will deviate from the benchmark and
typically range from 0.8-1.1, as measured over the most recent 12-month period.
Notwithstanding the overall diversification of the Program, the Chief Investment Officer
may set limits on any individual Manager’s tracking error and/or contribution to active
risk of the Program.
The aggregate holdings of any security may not exceed 7.5% of that security’s
outstanding shares.
No investment with any single manager can represent more than 20% of the total
Program’s assets. Passive (i.e., index replicating) managers are not subject to this
limitation.
It is expected that each Manager’s portfolio will be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting a Manager’s ability to out-perform its benchmark. That is, an individual
Manager’s portfolio may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 40
APPENDIX 7C
This Version: May 12, 2016
Last approved: November 15, 2012
EMERGING MARKET NON U.S. EQUITY
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Emerging Market Non U.S. Equity allocation of the Fund
(“the Program”). These Objectives and Guidelines shall be subject to ongoing review by the
Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1.
Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in common stocks of emerging market domiciled companies which exceeds the
return on the MSCI Emerging Market (Net Dividends) Index (“Benchmark”), while maintaining
risk similar to that of the Benchmark. The Benchmark shall be unhedged. (See part (e) below.)
b. Investment Strategy
The Program shall be implemented by hiring multiple external investment managers
(“Managers”). Each Manager’s strategy will focus on a subset of the broad equity market in
which the Manager is believed to have a competitive advantage in providing returns in excess of
its respective benchmark on a risk adjusted basis. The Chief Investment Officer will monitor
whether the aggregate of all externally managed portfolios adheres to these Guidelines, and in
particular achieves the overall performance and risk objectives stated below. In addition, each
Manager shall have written guidelines, which will detail its strategy, performance objectives,
permitted investments, and restrictions. The Chief Investment Officer will monitor each
Manager’s adherence to its respective guidelines. In no case may a Manager’s guidelines create
potential conflict with the Guidelines for the Program.
c.
Performance Objective
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, or style benchmark, which is appropriate to its individual strategy, and
specified in its guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 41
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
400 basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
e.
Currency Risk
The Committee accepts that as a US dollar denominated investor, investing in Emerging
Markets equity implicitly involves currency risk. The Committee accepts this additional risk or
volatility as part of the asset class and has adopted an “unhedged” performance benchmark. An
unhedged benchmark is a benchmark in which the underlying securities’ returns are translated
from their local currency back to US dollars at each measurement date.
However, this general policy toward currency risk shall not prevent individual Managers
from fully or partially hedging or otherwise actively managing the currency risk in their
portfolios (subject to their individual guidelines). Nor shall it prevent the Chief Investment
Officer from employing currency overlay managers to manage the currency risk of the aggregate
portfolio.
The contribution to active risk resulting from the aggregate of active currency
management, whether by Managers or by the Chief Investment Officer’s overlay managers, shall
be included in the total tracking error and be subject to limitations above and to the Retirement
Fund’s overall risk budget as described in Appendix 2.
2.
Investment Guidelines
a. Asset Allocation
It is expected that the Program will be fully invested in equity and equity related
securities at all times. Any cash held by Managers for the purpose of facilitating cash flows or
portfolio transactions will be swept daily by the custodian. The Chief Investment Officer or
designated overlay manager may equitize this cash using appropriate derivatives contracts.
b. Types of Securities
The Program will be invested in diversified portfolios of common stocks that are listed on
national securities exchanges. These common stocks shall be predominantly of companies
domiciled in emerging market countries. Managers may also invest in stocks that are traded
over-the-counter and in other equity-related securities and private placements as limited in their
guidelines. Subject to limitations in their guidelines, Managers may obtain equity exposure
through their own specialty commingled funds.
Managers may use currency futures, forward contracts, or options to manage currency
risk and hedge existing equity exposures. Use of and limits on equity derivative securities by
individual managers must be specified in writing in their guidelines and must be consistent with
the Derivatives Policy, Appendix 4.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 42
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk and
will exhibit portfolio risk characteristics similar to those of the Benchmark. The Chief
Investment Officer is responsible for managing aggregate risk exposures, including country
allocation, industry allocation, and currency.
The following limitations apply:
The Program’s beta with respect to the benchmark will deviate from the benchmark and
typically range from 0.8-1.1, as measured over the most recent 12-month period.
Notwithstanding the overall diversification of the Program, the Chief Investment Officer
may set limits on any individual Manager’s tracking error and/or contribution to active
risk of the Program.
The aggregate holdings of any security may not exceed 7.5% of that security’s
outstanding shares.
No investment with any single manager can represent more than 20% of the total
Program’s assets. Passive (i.e., index replicating) managers are not subject to this
limitation.
It is expected that each Manager’s portfolio will be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk without
unduly restricting a Manager’s ability to out-perform its benchmark. That is, an individual
Manager’s portfolio may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 43
APPENDIX 7D
This version: May 12, 2016
Last approved: November 15, 2012
GLOBAL EQUITY
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Global Equity allocation of the Fund (“the Program”).
Wherever appropriate, these guidelines and objectives are consistent with guidelines for other
Public Equity classes. These Objectives and Guidelines shall be subject to ongoing review by
the Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in common stocks which exceeds the return on the global equity market, measured
by the MSCI All Country World Index (ACWI) Investable Market Tobacco Free (Net
Dividends) Index (“Benchmark”), while maintaining risk similar to that of the Benchmark. The
Benchmark shall be unhedged. (See part (e) below.)
b. Investment Strategy
The Program shall be implemented by hiring multiple external investment managers
(“Managers”). Each Manager’s strategy will focus on a subset of the global equity market in
which the Manager is believed to have a competitive advantage in providing returns in excess of
its respective benchmark on a risk adjusted basis. The Chief Investment Officer will monitor
whether the aggregate of all externally managed portfolios adheres to these Guidelines, and in
particular achieves the overall performance and risk objectives stated below. In addition, each
Manager shall have written guidelines, which will detail its strategy, performance objectives,
permitted investments, and restrictions. The Chief Investment Officer will monitor each
Manager’s adherence to its respective guidelines. In no case may a Manager’s guidelines create
potential conflict with the Guidelines for the Program.
c.
Performance Objective
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, or style benchmark, which is appropriate to its individual strategy, and
specified in its guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 44
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
400 basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
e.
Currency Risk
The Committee accepts that as a US dollar denominated investor, investing in Global
equity implicitly involves currency risk. The Committee accepts this additional risk or volatility
as part of the asset class and has adopted an “unhedged” performance benchmark. An unhedged
benchmark is a benchmark in which the underlying securities’ returns are translated from their
local currency back to US dollars at each measurement date.
However, this general policy toward currency risk shall not prevent individual Managers
from fully or partially hedging or otherwise actively managing the currency risk in their
portfolios (subject to their individual guidelines). Nor shall it prevent the Chief Investment
Officer from employing currency overlay managers to manage the currency risk of the aggregate
portfolio.
The contribution to active risk resulting from the aggregate of active currency
management, whether by Managers or by the Chief Investment Officer’s overlay managers, shall
be included in the total tracking error and be subject to limitations above and to the Retirement
Fund’s overall risk budget as described in Appendix 2.
2. Investment Guidelines
a. Asset Allocation
It is expected that the Program will be fully invested in equity and equity-related
securities at all times. Any cash or held by Managers for the purpose of facilitating cash flows or
portfolio transactions will be swept daily by the custodian. The Chief Investment Officer or
designated overlay manager may equitize this cash using appropriate derivatives contracts.
b. Types of Securities
The Program will be invested in diversified portfolios of common stocks that are listed on
national securities exchanges. Managers may also invest in stocks that are traded over-the-
counter and in other equity-related securities (such as ETF’s) and private placements as limited
in their guidelines. Subject to limitations in their guidelines, Managers may also obtain equity
exposure through their own specialty commingled funds.
Managers may use currency futures, forward contracts, or options to manage currency
risk and hedge existing equity exposures. Use of and limits on currency and equity derivative
securities by managers must be specified in writing in their guidelines and must be consistent
with the Derivatives Policy, Appendix 4.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 45
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk and
will exhibit portfolio risk characteristics similar to those of the Benchmark. The Chief
Investment Officer is responsible for managing aggregate risk exposures. The following
limitations apply:
The Program’s beta with respect to the benchmark will deviate from the benchmark and
typically range from 0.8-1.1, as measured over the most recent 12-month period.
Notwithstanding the overall diversification of the Program, the Chief Investment Officer
may set limits on any individual Manager’s tracking error and/or contribution to active
risk of the Program.
The aggregate holdings of any security may not exceed 7.5% of that security’s
outstanding shares.
No investment with any single manager can represent more than 20% of the total
Program’s assets. Passive (i.e., index replicating) managers are not subject to this
limitation.
It is expected that each Manager’s portfolio will be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting a Manager’s ability to out-perform its benchmark. That is, an individual
Manager’s portfolio may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 46
APPENDIX 7E
This version: May 12, 2016
Last approved: November 15, 2012
LONG DURATION FIXED INCOME
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Long Duration Fixed Income allocation of the Fund (“the
Program”). These Objectives and Guidelines shall be subject to ongoing review by the
Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in US dollar denominated bonds which exceeds the return on the long duration US
fixed income market, as measured by the Citigroup Large Pension Fund Index (“Benchmark”),
while maintaining risk similar to that of the Benchmark.
b. Investment Strategy
The Program shall be implemented by the Chief Investment Officer’s internal fixed
income staff, and may be supplemented by hiring multiple external investment managers
(internal and external strategies will be collectively referred to as “Managers”). Each strategy
will focus on a subset of the broad fixed income market in which the Manager is believed to have
a competitive advantage in providing returns in excess of its respective benchmark on a risk
adjusted basis. The Chief Investment Officer will monitor whether the aggregate of all fixed
income portfolios adheres to these Guidelines, and in particular achieves the overall performance
and risk objectives stated below. In addition, each Manager shall have written guidelines, which
will detail its strategy, performance objectives, permitted investments, and restrictions. The
Chief Investment Officer will monitor each Manager’s adherence to its respective guidelines. In
no case may a Manager’s guidelines conflict with the Guidelines for the Program.
c.
Performance Objectives
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, or style benchmark, which is appropriate to its individual strategy, and
specified in its guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 47
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be 150
basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
2. Investment Guidelines
a. Asset Allocation
The portfolio will be invested
primarily
in marketable, publicly traded, investment grade
fixed income instruments, notes, and debentures denominated in U.S. dollars.
b. Types of Securities
The Program will be invested in diversified portfolios of fixed income securities, similar
to those in the benchmark, and their derivative securities, subject to restrictions as noted in
general asset class and manager guidelines. For a description of the Benchmark see Appendix 8
(Definitions).
The following list is indicative of the securities which are appropriate for the Program,
given its Benchmark and risk budget. It should not be construed to be an exhaustive list of
“allowable” investment securities. Security types and/or strategies not specifically enumerated,
but which the Chief Investment Officer and Regents’ Investment Consultant believe are
appropriate and consistent with the Investment Policy may also be held.
(1)
Fixed income instruments
i.
Obligations issued or guaranteed by the U.S. Federal Government, U.S.
Federal Agencies, or U.S. government-sponsored corporations and
agencies
ii.
Obligations of U.S. and foreign corporations such as corporate bonds,
convertible and non-convertible notes and debentures, preferred stocks,
and bank loans
iii.
Mortgage-backed and asset-backed securities, including CMBS, mortgage
TBAs, and other MBS derivatives, including CMOs, REMICs, IOs, and
POs
iv.
CBOs, CLOs, and CDOs
v.
Obligations of international agencies, supranational entities, and foreign
governments (or their subdivisions or agencies), as well as foreign
currency linked securities, warrants, preferred stocks, and forward
contracts.
vi.
Obligations issued or guaranteed by U.S. local, city and state governments
and agencies
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 48
vii.
Private Placements or Rule 144A securities, issued with or without
registration rights
(2)
Short term fixed income instruments
i.
U.S. Treasury and Agency bills and notes
ii.
Certificates of deposit
iii.
Bankers acceptances
iv.
Commercial paper
v.
Repurchase and reverse repurchase agreements (must be fully
collateralized with approved collateral, using approved counterparties
only)
vi.
Eurodollar CD’s, TD’s, and commercial paper
vii.
U.S. and Eurodollar floating rate notes
viii.
Money market funds managed by the Custodian
ix.
Short Term Investment Pool (STIP), managed by the Chief Investment
Officer
(3)
Fixed income derivatives
i.
U.S. Treasury, Agency, and Eurodollar futures
ii.
Interest rate options, swaps, and swaptions
iii.
Credit default swaps (CDS) and their derivatives
iv.
Foreign currency forward contracts and options
v.
Inflation linked futures and swaps
vi.
Total rate of return swaps
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
Program’s investments will exhibit portfolio risk characteristics similar to the Benchmark. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
The average weighted effective duration of portfolio security holdings shall not
vary from that of the Benchmark index by more +/-20%.
Credit risk
o
No more than 10% of the Program’s investments, measured by market value,
should be below “investment grade”, i.e. rated lower than the following standards
or their equivalent by all major NRSROs
Standard & Poor’s and Fitch (BBB-)
Moody’s (Baa3)
o
Commercial Paper must have a rating of at least A-1, P-1, D-1, or F-1
o
The Program’s investments should exhibit an average credit quality of A (or
equivalent) or better. Split-rated credits are considered to have the higher credit
rating as long as the higher rating is given by one of the NRSROs
o
Except for securities issued by the U.S. Treasury or Agencies of the U.S.
Government, no more than 3% of the Program’s market value may be invested in
any single issuer.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 49
Liquidity risk
o
No more than 20% of the Program’s market value may be invested in Private
Placements or Rule 144A securities.
o
The Program’s investments in aggregate of any security may not exceed 20% of
that security’s outstanding par value, without a written exception approved by the
Chief Investment Officer.
Foreign exchange risk
o
No more than 10% of the Program market value can be invested in securities
denominated in currencies other than U.S. dollar.
Asset allocation risk
o
The Program’s investments in aggregate may overweight or underweight Core
sectors so that the Core sector contribution to portfolio effective duration is within
+/- 50% of the corresponding Benchmark core sector contribution to portfolio
effective duration. [Core sectors are defined as Government Sponsored, Credit,
and Collateral.]
Notwithstanding the overall diversification of the Program, the Chief Investment Officer may set
limits on any individual Manager’s tracking error and/or contribution to active risk of the
Program.
It is expected that each Manager’s portfolio be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting the Manager’s ability to out-perform its benchmark. That is, the Managers’
portfolios may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 50
APPENDIX 7F
This Version: May 12, 2016
Last approved: November 15, 2012
CORE FIXED INCOME
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Core Fixed Income allocation of the Fund (“the Program”).
These Objectives and Guidelines shall be subject to ongoing review by the Committee. Capital
market conditions, changes in the investment industry, new financial instruments, or a change in
the Committee’s risk tolerance, are among factors to be considered in determining whether the
Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in U.S. dollar denominated bonds which exceeds the return on the aggregate U.S.
fixed income market, as measured by the Barclays U.S. Aggregate Index (“Benchmark”), while
maintaining risk similar to that of the Benchmark.
b. Investment Strategy
The Program shall be implemented by the Chief Investment Officer’s internal fixed
income staff, and may be supplemented by hiring multiple external investment managers
(internal and external strategies will be collectively referred to as “Managers”). Each Manager’s
strategy will focus on a subset of the broad fixed income market in which the Manager is
believed to have a competitive advantage in providing returns in excess of its respective
benchmark on a risk adjusted basis. The Chief Investment Officer will monitor whether the
aggregate of all fixed income portfolios adheres to these Guidelines, and in particular achieves
the overall performance and risk objectives stated below. In addition, each Manager shall have
written guidelines, which will detail its strategy, performance objectives, permitted investments,
and restrictions. The Chief Investment Officer will monitor each Manager’s adherence to its
respective guidelines. In no case may a Manager’s guidelines conflict with the Guidelines for
the Program.
c.
Performance Objectives
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, or style benchmark, which is appropriate to its individual strategy, and
specified in its guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 51
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
100 basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
2. Investment Guidelines
a. Asset Allocation
The portfolio will be invested primarily in marketable, publicly traded, investment grade
fixed income instruments, notes and debentures denominated in U.S. dollars.
b. Types of Securities
The Program will be invested in diversified portfolios of fixed income securities, similar
to those in the benchmark, and their derivative securities, subject to restrictions as noted in
general asset class and manager guidelines. For a description of the Benchmark see Appendix 8
(Definitions).
The following list is indicative of the securities which are appropriate for the Program,
given its Benchmark and risk budget. It should not be construed to be an exhaustive list of
“allowable” investment securities. Security types and/or strategies not specifically enumerated,
but which the Chief Investment Officer and Regents’ Investment Consultant believe are
appropriate and consistent with the Investment Policy may also be held.
(1)
Fixed income instruments
i.
Obligations issued or guaranteed by the U.S. Federal Government, U.S.
Federal Agencies or U.S. government-sponsored corporations and
agencies
ii.
Obligations of U.S. and foreign corporations such as corporate bonds,
convertible and non-convertible notes and debentures, preferred stocks,
and bank loans
iii.
Mortgage-backed and asset-backed securities, including CMBS, mortgage
TBAs, and other MBS derivatives, including CMOs, REMICs, IOs, and
POs
iv.
CBOs, CLOs, and CDOs
v.
Obligations of international agencies, supranational entities, and foreign
governments (or their subdivisions or agencies), as well as foreign
currency linked securities, warrants, preferred stocks and forward
contracts.
vi.
Obligations issued or guaranteed by U.S. local, city, and state
governments and agencies
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 52
vii.
Private Placements or Rule 144A securities, issued with or without
registration rights
(2)
Short term fixed income instruments
i.
U.S. Treasury and Agency bills and notes
ii.
Certificates of deposit
iii.
Bankers acceptances
iv.
Commercial paper
v.
Repurchase and reverse repurchase agreements (must be fully
collateralized with approved collateral, using approved counterparties
only)
vi.
Eurodollar CDs, TDs, and commercial paper
vii.
U.S. and Eurodollar floating rate notes
viii.
Money market funds managed by the Custodian
ix.
Short Term Investment Pool (STIP), managed by the Chief Investment
Officer
(3)
Fixed income derivatives
i.
U.S. Treasury, Agency, and Eurodollar futures
ii.
Interest rate options, swaps, and swaptions
iii.
Credit default swaps (CDS) and their derivatives
iv.
Foreign currency forward contracts and options
v.
Inflation linked futures and swaps
vi.
Total rate of return swaps
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
Program’s investments will exhibit portfolio risk characteristics similar to the Benchmark. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
The average weighted effective duration of portfolio security holdings shall not
vary from that of the Benchmark index by more +/-50%.
Credit risk
o
No more than 15% of the Program’s investments, measured by market value,
should be below “investment grade”, i.e. rated lower than the following standards
or their equivalent by all major NRSROs
Standard & Poor’s and Fitch (BBB-)
Moody’s (Baa3)
o
Commercial Paper must have a rating of at least A-1, P-1, D-1, or F-1
o
The Program’s investments should exhibit an average credit quality of A- (or
equivalent) or better. Split-rated credits are considered to have the higher credit
rating as long as the higher rating is given by one of the NRSROs
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 53
o
Except for securities issued by the U.S. Treasury or Agencies of the U.S.
Government, no more than 3% of the Program’s market value may be invested in
any single issuer.
Liquidity risk
o
No more than 20% of the Program’s market value may be invested in Private
Placements or Rule 144A securities.
o
The Program’s investments in aggregate of any security may not exceed 20% of
that security’s outstanding par value, without a written exception approved by the
Chief Investment Officer.
Foreign exchange risk
o
No more than 10% of the Program market value can be invested in securities
denominated in currencies other than U.S. dollar.
Asset allocation risk
o
The Program’s investments in aggregate may overweight or underweight Core
sectors so that the Core sector contribution to portfolio effective duration is within
+/- 50% of the corresponding Benchmark core sector contribution to portfolio
effective duration. [Core sectors are defined as Government Sponsored, Credit,
and Collateral.]
Notwithstanding the overall diversification of the Program, the Chief Investment Officer may set
limits on any individual Manager’s tracking error and/or contribution to active risk of the
Program.
It is expected that each Manager’s portfolio be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting the Manager’s ability to out-perform its benchmark. That is, the Managers’
portfolios may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 54
APPENDIX 7G
This Version: May 12, 2016
Last approved: November 15, 2012
TIPS (TREASURY INFLATION PROTECTED SECURITIES)
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the TIPS allocation of the Fund (“the Program”). These
Objectives and Guidelines shall be subject to ongoing review by the Committee. Capital market
conditions, changes in the investment industry, new financial instruments, or a change in the
Committee’s risk tolerance, are among factors to be considered in determining whether the
Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in U.S. Government issued, dollar denominated, inflation protected bonds which
exceeds the return on the Barclays U.S. TIPS Index (“Benchmark”), while maintaining risk
similar to that of the Benchmark.
b. Investment Strategy
The Program shall be managed by the Chief Investment Officer’s internal fixed income
staff (“Manager”). The Chief Investment Officer will monitor whether the Program adheres to
these Guidelines, and in particular achieves the performance and risk objectives stated below.
c.
Performance Objectives
The performance objective of the Program is to exceed the return of the Benchmark, on a
consistent basis over time, net of all costs and fees.
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
200 basis points.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 55
2. Investment Guidelines
a. Asset Allocation / Types of Securities
The Program will be invested in diversified portfolios of fixed income securities, similar
to those in the benchmark, and their derivative securities, subject to restrictions as noted in
general asset class and manager guidelines. For a description of the Benchmark see Appendix 8
(Definitions).
The following list is indicative of the securities which are appropriate for the Program,
given its Benchmark and risk budget. It should not be construed to be an exhaustive list of
“allowable” investment securities. Security types and/or strategies not specifically enumerated,
but which the Chief Investment Officer and Regents’ Investment Consultant believe are
appropriate and consistent with the Investment Policy may also be held.
(1)
Fixed income instruments
i.
U.S. Treasury Inflation Protected Securities
ii.
U.S. Treasury nominal bonds and notes
iii.
Non-U.S. sovereign inflation linked bonds (G10 countries only)
iv.
Corporate issued inflation linked bonds
(2)
Short term fixed income instruments
i.
U.S. Treasury bills and notes
ii.
Money market funds managed by the Custodian
iii.
Short Term Investment Pool (STIP), managed by the Chief Investment
Officer
(3)
Fixed income derivatives
i.
U.S. Treasury and Eurodollar futures
ii.
Foreign currency forward contracts and options
iii.
Inflation linked futures and swaps
iv.
Total rate of return swaps
b.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
Program’s investments will exhibit portfolio risk characteristics similar to the Benchmark. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
The average weighted effective duration of portfolio security holdings shall not
vary from that of the Benchmark index by more +/-20%.
Credit risk
o
No more than 10% of the Program’s investments, measured by market value, may
be issued by non-sovereign issuers
No more than 3% of the Program’s market value may be invested in any
single non-sovereign issuer
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 56
Foreign exchange risk
o
No more than 10% of the Program market value may be invested in securities
denominated in currencies other than U.S. dollar
All securities denominated in currencies other than U.S. dollar must be
currency hedged back to U.S. Dollar
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 57
APPENDIX 7H
This Version: May 12, 2016
Last approved: November 15, 2012
NON
-
DOLLAR DENOMINATED FIXED INCOME
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Non-Dollar Denominated Fixed Income allocation of the
Fund (“the Program”). These Objectives and Guidelines shall be subject to ongoing review by
the Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in Non-U.S. dollar denominated bonds which exceeds the return on the Non-Dollar
denominated global fixed income market, as measured by the Citigroup World Government
Bond–ex U.S Index. (“Benchmark”), while maintaining risk similar to that of the Benchmark.
The Benchmark shall be unhedged. (See part (e) below.)
b.
Investment Strategy
The Program shall be implemented by a combination of the Chief Investment Officer’s
internal fixed income staff and multiple external investment managers (internal and external
strategies will be collectively referred to as “Managers”). Each Manager’s strategy will focus on
a subset of the Non U.S. dollar denominated fixed income market in which the Manager is
believed to have a competitive advantage in providing returns in excess of its respective
benchmark on a risk adjusted basis. The Chief Investment Officer will monitor whether the
aggregate of all Non U.S. dollar denominated fixed income portfolios adheres to these
Guidelines, and in particular achieves the overall performance and risk objectives stated below.
In addition, each Manager shall have written guidelines, which will detail its strategy,
performance objectives, permitted investments, and restrictions. The Chief Investment Officer
will monitor each Manager’s adherence to its respective guidelines. In no case may a Manager’s
guidelines conflict with the Guidelines for the Program.
c.
Performance Objectives
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 58
unique objective, (benchmark), which is appropriate to its individual strategy, and specified in its
guidelines.
d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
200 basis points. Each Manager will have a unique active risk budget, relative to its specific
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
e.
Currency Risk
The Committee accepts that as a U.S. dollar denominated investor, investing in Non U.S.
dollar denominated bonds implicitly involves currency risk. The Committee accepts this
additional risk or volatility as part of the asset class and has adopted an “unhedged” performance
benchmark. An unhedged benchmark is a benchmark in which the underlying securities’ returns
are translated from their local currency back to U.S. dollars at each measurement date.
However, this general policy toward currency risk shall not prevent individual Managers
from fully or partially hedging or otherwise actively managing the currency risk in their
portfolios (subject to their individual guidelines). Nor shall it prevent the Chief Investment
Officer from employing currency overlay managers to manage the currency risk of the aggregate
portfolio.
The contribution to active risk resulting from the aggregate of active currency
management, whether by Managers or by the Chief Investment Officer’s overlay managers, shall
be included in the total tracking error and be subject to limitations above and to the Retirement
Fund’s overall risk budget as described in Appendix 2.
f.
Other Constraints and Considerations
Managers shall comply with applicable State and Federal laws and regulations and the
prudence requirement described in section 3(a) of the Policy.
Managers shall act solely in the interest of the Fund’s constituents.
Implementation of this Program shall comply with the Fund’s Policy.
2. Investment Guidelines
a. Asset Allocation
The portfolio will be invested primarily in marketable, publicly traded, investment grade
fixed income instruments, notes and debentures issued by developed market countries other than
the U.S. and denominated in currencies other than U.S. dollars.
Nothing in these guidelines shall be construed to restrict the use of diversified global
fixed income strategies (consisting of bonds denominated in both U.S. and Non-U.S. currencies).
The Chief Investment Officer shall ensure that such strategies are consistent with both these
guidelines and the guidelines of the other fixed income Programs, and may develop separate
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 59
guidelines for such strategies to ensure that performance and risk objectives for all fixed income
classes are met.
b. Types of Securities
The Program will be invested in diversified portfolios of fixed income securities, similar
to those in the benchmark, and their derivative securities, subject to restrictions as noted in
general asset class and manager guidelines. For a description of the Benchmark see Appendix 8
(Definitions).
The following list is indicative of the securities which are appropriate for the Program,
given its Benchmark and risk budget. It should not be construed to be an exhaustive list of
“allowable” investment securities. Security types and/or strategies not specifically enumerated,
but which the Chief Investment Officer and Regents’ Investment Consultant believe are
appropriate and consistent with the Investment Policy may also be held.
(1)
Fixed income instruments
i.
Obligations of foreign governments (or their subdivisions or agencies),
international agencies, and supranational entities
ii.
Obligations of U.S. and foreign corporations such as corporate bonds,
convertible and non-convertible notes and debentures, preferred stocks,
and bank loans
iii.
Obligations issued or guaranteed by the U.S. Federal Government, U.S.
Federal Agencies or U.S. government-sponsored corporations and
agencies
(2)
Short term fixed income instruments
i.
U.S. dollar and foreign currencies
ii.
Short term obligations of U.S. and foreign governments
iii.
Repurchase and reverse repurchase agreements (must be fully
collateralized with approved collateral, using approved counterparties
only)
iv.
Eurodollar CD’s and Eurodollar floating rate notes
v.
Money market funds managed by the Custodian
vi.
Short Term Investment Pool (STIP), managed by the Chief Investment
Officer
(3)
Currency and Fixed income derivatives
i.
Government bond and other bond index futures
ii.
Interest rate options, swaps, and swaptions
iii.
Single name or basket Credit default swaps (CDS)
iv.
Foreign currency forward contracts and options
v.
Total rate of return swaps
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 60
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
Program’s investments will exhibit portfolio risk characteristics similar to the Benchmark. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
The average weighted effective duration of portfolio security holdings shall not
vary from that of the Benchmark index by more +/-20%.
Credit risk
o
No more than 10% of the Program’s investments, measured by market value,
should be below “investment grade”, i.e. rated lower than the following standards
or their equivalent by all major NRSROs.
Standard & Poor’s and Fitch (BBB-)
Moody’s (Baa3)
o
The Program’s investments should exhibit an average credit quality of A (or
equivalent) or better. Split-rated credits are considered to have the higher credit
rating as long as the higher rating is given by one of the NRSROs .
o
Except for securities issued by the U.S. Treasury or sovereign entities included in
the benchmark, no more than 3% of the Program’s market value may be invested
in any single issuer.
Liquidity risk
o
The Program’s investments in aggregate of any security may not exceed 20% of
that security’s outstanding par value, without a written exception approved by the
Chief Investment Officer.
Foreign exchange risk
o
No more than 20% of the Program market value can be invested in securities
denominated in currencies other than currencies included in the Benchmark.
o
No more than 20% of the Program’s net foreign exchange exposure (inclusive of
currency overlay managers) can be in currencies not included in the Benchmark.
Asset allocation risk
o
The Program’s investments in aggregate may overweight or underweight
currencies so that each currency’s exposure is within +/- 20 percentage points of
the corresponding Benchmark currency’s exposure for Euro and Yen
denominated bonds, and is within +/- 10 percentage points of the corresponding
Benchmark currency’s exposure for all other currency denominated bonds,
including U.S. Dollar. That is, if Euro denominated bonds contribute 50% of the
Benchmark, then the Program’s Euro bonds exposure should be between 30%
and 70%.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 61
Notwithstanding the overall diversification of the Program, the Chief Investment Officer may set
limits on any individual Manager’s tracking error and/or contribution to active risk of the
Program.
It is expected that each Manager’s portfolio be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting the Manager’s ability to out-perform its benchmark. That is, the Managers’
portfolios may be more concentrated than is appropriate for the Program’s aggregate
investments.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
INVESTMENT POLICY STATEMENT
Page 62
APPENDIX 7I
This Version: May 12, 2016
Last approved: November 15, 2012
HIGH YIELD DEBT
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the High Yield Debt allocation of the Fund (“the Program”).
These Objectives and Guidelines shall be subject to ongoing review by the Committee. Capital
market conditions, changes in the investment industry, new financial instruments, or a change in
the Committee’s risk tolerance, are among factors to be considered in determining whether the
Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in high yield U.S. dollar denominated debt which exceeds the return of the non-
investment grade fixed income market, as measured by the Merrill Lynch High Yield Cash Pay
Index (“Benchmark”), while maintaining risk similar to that of the Benchmark.
b. Investment Strategy
The Program shall be implemented by a combination of the Chief Investment Officer’s
internal fixed income staff and multiple external investment managers (internal and external
strategies will be collectively referred to as “Managers”). Each Manager’s strategy will focus on
a subset of the high yield debt market in which the Manager is believed to have a competitive
advantage in providing returns in excess of its respective benchmark on a risk adjusted basis.
The Chief Investment Officer will monitor whether the aggregate of all high yield debt portfolios
adheres to these Guidelines, and in particular achieves the overall performance and risk
objectives stated below. In addition, each Manager shall have written guidelines, which will
detail its strategy, performance objectives, permitted investments, and restrictions. The Chief
Investment Officer will monitor each Manager’s adherence to its respective guidelines. In no
case may a Manager’s guidelines conflict with the Guidelines for the Program.
c.
Performance Objectives
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, (benchmark), which is appropriate to its individual strategy, and specified in its
guidelines.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
350 basis points. Each Manager will have a unique active risk budget, relative to its specific
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
2. Investment Guidelines
a. Asset Allocation
The portfolio will be invested primarily in marketable, publicly traded, non-investment
grade debt instruments, notes and debentures denominated in U.S. dollars.
b. Types of Securities
The Program will be invested in diversified portfolios of fixed income securities, similar
to those in the benchmark, and their derivative securities, subject to restrictions as noted in
general asset class and manager guidelines. For a description of the Benchmark see Appendix 8
(Definitions).
The following list is indicative of the securities which are appropriate for the Program,
given its Benchmark and risk budget. It should not be construed to be an exhaustive list of
“allowable” investment securities. Security types and/or strategies not specifically enumerated,
but which the Chief Investment Officer and Regents’ Investment Consultant believe are
appropriate and consistent with the Investment Policy may also be held, subject to the
restrictions in general asset class and manager guidelines.
(1)
Fixed income instruments
i.
Obligations of U.S. and foreign corporations such as corporate bonds,
convertible and non-convertible notes and debentures, preferred stocks,
and bank loans
ii.
Obligations of international agencies, supranational entities, and foreign
governments (or their subdivisions or agencies).
iii.
Obligations issued or guaranteed by U.S. local, city and state governments
and agencies
iv.
Private Placements or Rule 144A securities, issued with or without
registration rights
(2)
Short term fixed income instruments
i.
U.S. Treasury and Agency bills and notes
ii.
Repurchase and reverse repurchase agreements (must be fully
collateralized with approved collateral, using approved counterparties
only)
iii.
Money market funds managed by the Custodian
iv.
Short Term Investment Pool (STIP), managed by the Chief Investment
Officer
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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(3)
Fixed income derivatives
i.
U.S. Treasury, Agency, and Eurodollar futures
ii.
Interest rate options, swaps, and swaptions
iii.
Credit default swaps (CDS) and their derivatives
iv.
Total rate of return swaps
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
Program’s investments will exhibit portfolio risk characteristics similar to the Benchmark. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
The average weighted spread duration of portfolio security holdings shall not vary
from that of the Benchmark index by more +/-20%.
Credit risk
o
No more than 10% of the Program’s investments, measured by market value,
should be rated “in default”, i.e. rated lower than the following standards or their
equivalent by all major NRSROs.
Standard & Poor’s and Fitch (C)
Moody’s (C)
o
The Program’s investments should exhibit an average credit quality of B- (or
equivalent) or better. Split-rated credits are considered to have the higher credit
rating as long as the higher rating is given by one of the NRSROs.
o
Except for securities issued by the U.S. Treasury or Agencies of the U.S.
Government, no more than 5% of the Program’s market value may be invested in
any single issuer.
Liquidity risk
o
No more than 50% of the Program’s market value may be invested in Private
Placements.
o
The Program’s investments in aggregate of any marketable security may not
exceed 20% of that security’s outstanding par value, without a written exception
approved by the Chief Investment Officer.
Foreign exchange risk
o
No more than 10% of the Program market value can be invested in securities
denominated in currencies other than U.S. dollar.
Notwithstanding the overall diversification of the Program, the Chief Investment Officer may set
limits on any individual Manager’s tracking error and/or contribution to active risk of the
Program.
It is expected that each Manager’s portfolio be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting the Manager’s ability to out-perform its benchmark. That is, the Managers’
portfolios may be more concentrated than is appropriate for the Program’s aggregate
investments.
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APPENDIX 7J
This version: May 12, 2016
Last approved: January 1, 2013
EMERGING MARKET DEBT
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Emerging Market Debt allocation of the Fund (“the
Program”). These Objectives and Guidelines shall be subject to ongoing review by the
Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in debt of issuers in emerging market countries which exceeds the return on the
Benchmark, which is the J.P. Morgan Emerging Markets Bond Index – Global Diversified [hard
currency], while maintaining risk similar to that of the Benchmark.
b. Investment Strategy
The Program shall be implemented by a combination of the Chief Investment Officer’s
internal fixed income staff, and multiple external investment managers (internal and external
strategies will be collectively referred to as “Managers”). Each Manager’s strategy will focus on
a subset of the emerging market debt universe in which the Manager is believed to have a
competitive advantage in providing returns in excess of its respective benchmark on a risk
adjusted basis. The Chief Investment Officer will monitor whether the aggregate of all emerging
market debt portfolios adheres to these Guidelines, and in particular achieves the overall
performance and risk objectives stated below. In addition, each Manager shall have written
guidelines, which will detail its strategy, performance objectives, permitted investments, and
restrictions. The Chief Investment Officer will monitor each Manager’s adherence to its
respective guidelines. In no case may a Manager’s guidelines conflict with the Guidelines for
the Program.
c.
Performance Objectives
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees. Each Manager will have a
unique objective, (benchmark), which is appropriate to its individual strategy, and specified in its
guidelines.
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d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
500 basis points. Each Manager will have a unique active risk budget, relative to its specific
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
2. Investment Guidelines
a. Asset Allocation
The portfolio will be invested primarily in marketable, publicly traded, fixed income
instruments, notes and debentures issued by emerging market sovereign or corporate issuers,
denominated in U.S. dollars and issuers’ local currencies.
b. Types of Securities
The Program will be invested in diversified portfolios of fixed income securities, similar
to those in the benchmark, and their derivative securities, subject to restrictions noted below in
section 2c and 2d. For a description of the Benchmark see Appendix 8 (Definitions).
The following list is indicative of the securities which are appropriate for the Program,
given its Benchmark and risk budget. It should not be construed to be an exhaustive list of
“allowable” investment securities. Security types and/or strategies not specifically enumerated,
but which the Chief Investment Officer and Regents’ Investment Consultant believe are
appropriate and consistent with the Investment Policy may also be held, subject to the
restrictions in 2c and 2d below.
(1)
Fixed income instruments
i.
Obligations of foreign governments (or their subdivisions or agencies),
international agencies, and supranational entities.
ii.
Obligations of foreign corporations such as corporate bonds, convertible
and non-convertible notes and debentures, preferred stocks, and bank
loans
iii.
Private Placements or Rule 144A securities, issued with or without
registration rights
(2)
Short term fixed income instruments
i.
U.S. Treasury and Agency bills and notes
ii.
Repurchase and reverse repurchase agreements (must be fully
collateralized with approved collateral, using approved counterparties
only)
iii.
Eurodollar CD’s, TD’s, and commercial paper
iv.
U.S. and Eurodollar floating rate notes
v.
Money market funds managed by the Custodian
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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vi.
Short Term Investment Pool (STIP), managed by the Chief Investment
Officer
(3)
Fixed income derivatives
i.
U.S. Treasury, Agency, and Eurodollar futures
ii.
Interest rate options, swaps, and swaptions
iii.
Credit default swaps (CDS) and their derivatives
iv.
Foreign currency forward contracts and options
v.
Total rate of return swaps
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
Program’s investments will exhibit portfolio risk characteristics similar to the Benchmark. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
The average weighted effective duration of portfolio security holdings shall not
vary from that of the Benchmark index by more +/-20%.
Credit risk
o
No more than 50% of the Program’s investments, measured by market value,
should be rated “B+” (or equivalent) or below by all major NRSROs.
Standard & Poor’s and Fitch (B+)
Moody’s (B1)
o
The Program’s investments should exhibit an average credit quality of BB (or
equivalent) or better. Split-rated credits are considered to have the higher credit
rating as long as the higher rating is given by one of the NRSROs.
o
Except for securities issued by the U.S. Treasury or sovereign entities included in
the Benchmark, no more than 5% of the Program’s market value may be invested
in any single issuer, without a written exception approved by the Chief
Investment Officer.
Liquidity risk
o
The Program’s investments in aggregate of any security may not exceed 20% of
that security’s outstanding par value, without a written exception approved by the
Chief Investment Officer.
Asset allocation and Foreign currency risk
o
The Program’s investments in aggregate may overweight or underweight issuer
countries (including their currencies) so that each country’s exposure is within
+/- 20 percentage points of the corresponding Benchmark country’s exposure.
That is, if Brazilian bonds (including currency) comprise 20% of the total
Benchmark, then the Program’s Brazilian bond and currency exposure should be
between 0% and 40%.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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Notwithstanding the overall diversification of the Program, the Chief Investment Officer may set
limits on any individual Manager’s tracking error and/or contribution to active risk of the
Program.
It is expected that each Manager’s portfolio be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting the Manager’s ability to out-perform its benchmark. That is, the Managers’
portfolios may be more concentrated than is appropriate for the Program’s aggregate
investments.
d.
Managers shall employ best execution.
Transactions shall be directed to brokers/dealers designated by the Chief Investment
Officer at the Manager’s discretion when best execution is available.
e.
Managing Cash Flows
Managers may use derivatives and foreign exchange forwards for facilitating investment
of cash flows related to income received, contributions, withdrawals, or other asset allocation
rebalancing. Fixed income exposure, including cash and derivative instruments, shall at all times
be equal to the market value of the portfolio. (Leverage is not permitted.)
3. Evaluation and Review
a. Policy and Guideline Review
The Chief Investment Officer shall review the Objectives and Guidelines at least
annually, and report to the Committee on the impact of the Guidelines on the Program’s
performance.
b. Program performance and risk exposures shall be evaluated at multiple levels in
accordance with the performance objectives of the Program and individual Managers.
4. Reporting
On a quarterly basis, the Chief Investment Officer shall provide the following reports to the
Committee:
a. A performance attribution explaining differences in country weights and returns, between
the aggregate Program investments and the Benchmark, and an explanation of any
material differences.
b. A forecast risk report, using the Chief Investment Officer’s risk system, showing the
total, systematic (“common factor”), and non-systematic (“residual”) risk of the
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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aggregate portfolio, the Benchmark, and the active Program relative to the Benchmark,
and an explanation of any material differences.
c. A summary of individual Manager performance, on an absolute and benchmark relative
basis.
Managers will be required to provide the Chief Investment Officer monthly and quarterly
reports, including but not limited to:
a.
A monthly performance statement for the portfolio (gross and net) and the benchmark,
and also provide the gross performance for the product Composite at least quarterly.
b.
If available, a monthly or quarterly forecast risk report, using the Manager’s risk system,
showing the total, systematic (“common factor”), and non-systematic (“residual”) risk of
the portfolio relative to the benchmark.
c.
A monthly or quarterly variance analysis, indicating sources of performance variances
(difference between portfolio and benchmark return), and an explanation of any material
differences.
d.
A quarterly review of portfolio and strategy performance including a market outlook.
e.
An annual statement of compliance with investment guidelines.
5.
Definitions: See Appendix 8
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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APPENDIX 7K
This version: November 15, 2012
Last approved: September 10, 2009
SHORT TERM INVESTMENT POOL (STIP)
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the University’s Short Term Investment Pool, or STIP
(“Program”). These Objectives and Guidelines shall be subject to ongoing review by the
Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1. Investment Policy
a. Background
The STIP is a cash investment pool established by The Regents and is available to all
University groups, including retirement and endowment funds. The STIP allows fund
participants to maximize income on their short-term cash balances by taking advantage of the
economies of scale of investing in a larger pool and investing in a broader range of maturities.
b. Investment Objective
The Objective of the Program is to maximize returns consistent with safety of principal,
liquidity, and cash flow requirements. The primary investment objective is to generate income
from investments in short duration U.S. dollar denominated bonds and cash equivalents.
Because the liquidity needs of the University are subject to large and uncertain changes, the fund
may materially increase its investments in highly liquid, cash equivalent securities from time to
time.
Accordingly, the Benchmark will be a weighted average of the income return on a
constant maturity two (2) year Treasury note and the return on U.S. 30-day Treasury Bills. The
weights for the two constituents will be the actual average weights of the bond and cash
equivalent components of the pool. The Benchmark will be re-balanced monthly.
c.
Investment Strategy
The Program shall be implemented by the Chief Investment Officer internal fixed income
staff (“Manager”). The Chief Investment Officer will monitor the Program’s adherence to these
Guidelines.
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d.
Performance Objectives
The performance objective of the Program is to meet or exceed the return of the
Benchmark, on a consistent basis over time, net of all costs and fees.
e.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
75 basis points.
f.
Other Constraints and Considerations
Managers shall comply with applicable State and Federal laws and regulations and
the prudence requirement described in section 3(a) of the Policy.
Manager shall act solely in the interest of the Fund’s owners.
Implementation of this Program shall comply with the Fund’s Policy.
2.
Investment Guidelines
a. Asset Allocation
The portfolio will be invested primarily in marketable, publicly traded, investment grade
short term fixed income instruments, notes and debentures denominated in U.S. dollars.
b. Types of Securities
The Program will be invested in a diversified portfolio of fixed income securities, subject
to restrictions noted below in section 2c. and 2d.
The following list is indicative of the investment classes which are appropriate for the
Program, given its Benchmark and risk budget. It should not be construed to be an exhaustive
list of “allowable” asset types. Security types and/or strategies not specifically enumerated, but
which the Chief Investment Officer and Regents’ Investment Consultant believe are appropriate
and consistent with the Investment Policy may also be held, subject to the restrictions in 2c. and
2d. below.
(1)
Fixed income instruments
i.
Obligations issued or guaranteed by the U.S. Federal Government, U.S.
Federal Agencies or U.S. government-sponsored corporations and
agencies
ii.
Obligations of U.S. and foreign corporations such as corporate bonds,
notes and debentures, and bank loans
iii.
Mortgage-backed and asset-backed securities
iv.
Obligations of international agencies, supranational entities, and foreign
governments (or their subdivisions or agencies)
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v.
Obligations issued or guaranteed by U.S. local, city and state governments
and agencies
vi.
Private Placements or Rule 144A securities, issued with or without
registration rights
(2)
Short term fixed income instruments (having maturity of less than 13 months)
i.
U.S. Treasury and Agency bills and notes
ii.
Certificates of deposit
iii.
Bankers acceptances
iv.
Commercial paper
v.
Repurchase and reverse repurchase agreements (must be fully
collateralized with approved collateral, using approved counterparties
only)
vi.
Eurodollar CDs, TDs, and commercial paper
vii.
U.S. and Eurodollar floating rate notes
viii.
Money market funds managed by the custodian
c.
Restrictions
The following security types are
not
permitted:
Interest rate derivative contracts, including options and futures
Equity like securities, including but not limited to convertible bonds, preferred
stocks, warrants, equity linked notes, and commodities
Bonds issued in currencies other than U.S. Dollar
Foreign currency linked notes
The Manager may
not:
Purchase securities of tobacco related companies, as per the Policy, Appendix 7b.
Invest in mutual funds or group trusts unless specifically allowed in its guidelines
Buy securities on margin
Sell securities short
Buy party-in-interest securities
Buy securities restricted as to sale or transfer, except for 144A securities, which
are permitted
Employ economic leverage in the portfolio through borrowing or derivatives, or
engage in derivative strategies that conflict with the Derivatives Policy
Purchase or sell foreign exchange contracts
d.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk. The
following limitations apply in order to manage risk within acceptable ranges:
Interest rate risk
o
No security may have a maturity of more than 5½ years.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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Credit risk
o
No more than 5% of the Program’s investments, measured by market value,
should be below “investment grade”, i.e. rated lower than the following standards
or their equivalent by all major NRSROs.
Standard & Poor’s and Fitch (BBB-)
Moody’s (Baa3)
o
Commercial Paper must have a rating of at least A-1, P-1, D-1, or F-1.
o
The Program’s investments should exhibit an average credit quality of A (or
equivalent) or better. Split-rated credits are considered to have the higher credit
rating as long as the higher rating is given by one of the NRSROs.
o
No more than 5% of the Program’s allocation to commercial paper may be
invested in any single issuer. This guideline may be exceeded on a temporary
basis due to unusual cash flows, up to a limit of 10%, for a period not to exceed
one month.
o
Except for securities issued by the U.S. Treasury or Agencies of the U.S.
Government, no more than 3% of the Program’s market value (exclusive of
commercial paper) may be invested in any single issuer.
Liquidity risk
o
No more than 10% of the Program’s market value may be invested in Private
Placements or Rule 144A securities.
o
The Programs’ investments in aggregate of any security may not exceed 20% of
that security’s outstanding par value, without a written exception approved by the
Chief Investment Officer.
Subject to the limitations above, the investment manager has complete discretion with regard to
choosing sector weights, issuers, and maturities.
e.
Managers shall employ best execution.
Transactions shall be directed to brokers/dealers designated by the Chief Investment
Officer at the Manager’s discretion when best execution is available.
3.
Evaluation and Review
a. Policy and Guideline Review
The Chief Investment Officer shall review the Objectives and Guidelines at least
annually, and report to the Committee on the impact of the Guidelines on the Program’s
performance.
b. Program performance and risk exposures shall be evaluated at multiple levels in
accordance with the Objectives of the Program and individual Managers.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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4.
Reporting
On a quarterly basis, the Chief Investment Officer shall provide the following reports to the
Committee:
a.
A summary of Program investments and risks.
b.
A summary of Program performance, on an absolute and benchmark relative basis.
Manager will be required to provide the Chief Investment Officer monthly and quarterly reports,
including but not limited to:
a.
Monthly accounting statements showing portfolio income, holdings and transactions.
b.
Quarterly review of portfolio and strategy performance including a market outlook.
c.
Annual statement of compliance with investment guidelines.
5.
Definitions: See Appendix 8
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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APPENDIX 7L
This version: May 12, 2016
Last approved: November 15, 2012
PRIVATE EQUITY
INVESTMENT GUIDELINES
The purpose for portfolio guidelines is to clearly define performance objectives and to control
risk. Portfolio guidelines to control risk should be subject to ongoing review.
Performance Objectives
The objective of the private equity portfolio is to earn a return, after adjusting for risk, that
exceeds the Russell 3000 Index return on a consistent basis over time.
Portfolio Guidelines
1.
Permissible investments include limited liability structures such as limited partnerships,
limited liability corporations, and other vehicles that invest in venture capital, buyouts, and
special situations. Permissible investments will be primarily private market assets, but may
include publicly traded assets, and may also include funds of funds, secondaries, co-
investments and direct equity investments.
2.
Venture Capital investments shall be limited to a maximum of 40 percent of the private
equity portfolio’s total market value, with a long-term target weight of no more than 20
percent.
3.
No single partnership commitment (including co-investments / direct equity investments) can
represent, at the time of commitment, more than 5 percent of the current private equity
allocation defined as the most recent quarter book value plus unfunded commitments plus
target commitment for the current (one) year.
4.
Investment in multiple funds of the same general partner is permitted. However, the total
commitment to partnerships with the same general partner (including co-investments / direct
equity investments), at the time of commitment, cannot exceed 15 percent of the budgeted
three year private equity allocation defined as current book value plus unfunded
commitments plus commitment level for the current year and two subsequent years.
5.
The commitment to any individual partnership is recommended not to exceed 30 percent of
the total capital raised by the partnership, up to a maximum of $150 million. The maximum
of 30 percent represents the ownership percentage of the partnership at each closing.
Exceptions to this limitation may be made by the Chief Investment Officer.
6.
The private equity portfolio should be diversified across time as well.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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7.
No single co-investment or direct investment company can represent, at the time of
commitment, more than $200 million at cost.
8.
Use of derivative securities by individual investment managers must be specified in writing
in the manager’s guidelines and must be consistent with the Derivatives Policy, Appendix 4.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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APPENDIX 7M
This version: May 12, 2016
Last approved: November 15, 2012
PRIVATE REAL ESTATE
INVESTMENT GUIDELINES
The purpose of the real estate investment guidelines is to define the investment objectives,
philosophy, and specific guidelines for making investments and the benchmarks to measure
performance.
Allocations and ranges for the principal strategies are shown below.
Strategy
Range
Core Real Estate
10%-80%
Value-Added Strategies
10%-50%
Opportunistic Strategies
10%-40%
Core Real Estate, Value Added Strategies, and Opportunistic Strategies constitute “Private Real
Estate.” Value Added and Opportunistic strategies together are referred to as “Non-Core.”
Investment Guidelines
1.
The benchmark for evaluating the Program’s investment performance will be the National
Council of Real Estate Investment Fiduciaries (NCREIF) Funds Index – Open-end
Diversified Core Equity Index (NFI-ODCE). The Program return is expected to meet or
exceed this benchmark, on a rolling three year basis, after deducting all costs and expenses
(“net returns”).
2.
Investments shall be in limited liability investment vehicles such as limited partnerships,
limited liability corporations, private REITs, and other commingled investment Funds.
Direct investments through discretionary Separate Accounts may be made through title
holding corporations.
3.
Investments shall be primarily equity-oriented, but may also include debt instruments secured
by real estate.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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4.
Specific property types in the Program shall be within the following ranges:
Property Diversification Guidelines
Property Type
Range
Office
20%-50%
Apartments
15%-50%
Industrial
15%-35%
Retail
15%-35%
Hospitality
Up to 20%
Other (incl. student housing)
Up to 35%
5.
Investments in the U.S. shall be diversified by geographic location as follows:
a.
Exposure (current NAV) in any one NFI-ODCE region within the total Private
program (commingled funds and separate accounts) not to exceed the weight of
that region in the NFI-ODCE index by more than 5%.
b.
Exposure (current NAV) in any one Metropolitan Statistical Area (or
Metropolitan Statistical Division, if applicable) within the Separate Account
portfolio not to exceed 20% of the Separate Account program allocation
(“allocation” meaning: NAV + Unfunded Commitments).
6.
Investments outside the U.S. may not represent more than 25% of the private real estate
portfolio and at the portfolio level must be diversified by type and geographic location.
7.
The Program’s investment in any one closed end fund shall not exceed 25% of the total
capital being raised for that fund, up to a maximum of $75 million.
8.
No more than 15% of the Program’s commingled Fund Net Asset Value + Unfunded
Commitments shall be invested with a single manager. No more than 25% of the Separate
Account program allocation shall be invested with a single manager (“allocation” meaning:
NAV + Unfunded Commitments).
9.
The Program’s outstanding investment(s) with any given firm, including its affiliates and
subsidiaries, may not exceed 20% of that firm’s total real estate equity under management.
10.
In order to enhance the alignment of interests of the investor and the sponsor, the sponsor of
a closed-end fund investment will be required to make a co-investment of at least 1%. This
also applies prospectively to Separate Account managers, except where prohibited by law or
regulation. Any exceptions must be approved by the Chief Investment Officer.
11.
Leverage at the Program level shall not exceed 90% of the (gross) market value of the total
assets of the Program. All leverage shall be non-recourse to The Regents, as trustee of
UCRP, with respect to UCRP investments in the Program.
12.
Letters of credit may be obtained or funding guarantees provided in favor of a lender in
connection with the development and operation of a property managed by a Separate
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Account manager through a property title holding corporation owned by The Regents as
trustee of UCRP, provided that such letter or guarantee does not encumber any assets other
than those previously committed to such separate account to fund such investment.
13.
The acquisition price of any single property or collective investment vehicle (portfolio of
properties) shall not exceed 5% of the total Separate Account program long-term allocation
(that is, Net Asset Value + Unfunded Commitments + unused capacity consistent with the
long-term policy targets of Real Estate). The Chief Investment Officer may approve the
acquisition of properties greater than 5% but less than 10% of the total Program allocation.
14.
Fund of Fund investments are permitted.
15.
Club deals and co-investments, in aggregate, shall not exceed 15% of total Program market
value, up to a limit of $300 million for any single deal.
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APPENDIX 7N
This version: May 12, 2016
Last approved: November 15, 2012
PUBLIC REAL ESTATE SECURITIES
INVESTMENT GUIDELINES
The purpose for these performance objectives (“Objectives”) and management guidelines
(“Guidelines”) is to clearly state the investment approach, define performance objectives and to
control risk in the management of the Public Real Estate Securities allocation of the Fund (“the
Program”). These Objectives and Guidelines shall be subject to ongoing review by the
Committee. Capital market conditions, changes in the investment industry, new financial
instruments, or a change in the Committee’s risk tolerance, are among factors to be considered in
determining whether the Guidelines shall be revised.
1. Investment Policy
a. Investment Objective
The primary investment objective of the Program is to generate a rate of return from
investments in public real estate securities which exceeds the return on the global real estate
securities market, measured by the FTSE EPRA NAREIT Global Index return (“Benchmark”),
while maintaining risk similar to that of the Benchmark.
b.
Investment Strategy
The Program shall be implemented by hiring multiple external investment managers
(“Managers”). Each Manager’s strategy will focus on a subset of the global real estate securities
market in which the Manager is believed to have a competitive advantage in providing returns in
excess of its respective benchmark on a risk adjusted basis. The Chief Investment Officer will
monitor whether the aggregate of all externally managed portfolios adheres to these Guidelines,
and in particular achieves the overall performance and risk objectives stated below. In addition,
each Manager shall have written guidelines, which will detail its strategy, performance
objectives, permitted investments, and restrictions. The Chief Investment Officer will monitor
each Manager’s adherence to its respective guidelines. In no case may a Manager’s guidelines
create potential conflict with the Guidelines for the Program.
c.
Performance Objective
Each Manager will have a unique objective, or style benchmark, which is appropriate to
its individual strategy, and specified in its guidelines. The Program return is expected to meet or
exceed a weighted aggregate of these benchmarks, on a consistent basis over time, after
deducting all costs and expenses.
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d.
Risk Objective
The Program shall be managed so that its annualized tracking error budget shall be
450 basis points. Each Manager will have a unique active risk budget, relative to its style
benchmark, which is appropriate to its individual strategy, and specified in its guidelines, and
which will reflect the risk-return profile of its specific investment objectives.
2.
Investment Guidelines
a. Asset Allocation
It is expected that the Program will be fully invested in equity and equity-related
securities at all times. Any cash held by Managers of separate accounts for the purpose of
facilitating cash flows or portfolio transactions will be swept daily by the custodian. The Chief
Investment Officer or designated overlay manager may equitize this cash using appropriate
derivatives contracts.
b.
Types of Securities
The Program will be invested in diversified portfolios of real estate securities that are
listed on national securities exchanges. Managers may also invest in stocks that are traded over-
the-counter and in other real estate-related securities and private placements as limited in their
guidelines. A real estate-related company is one in which the predominant share of EBITDA is
derived from rental income and/or the equity ownership of real estate.
c.
Diversification and Concentration
The Program’s investments will be appropriately diversified to control overall risk and
will exhibit portfolio risk characteristics similar to those of the Benchmark. The Chief
Investment Officer is responsible for managing aggregate risk exposures. The following
limitations apply:
The Program’s beta with respect to the Benchmark will not be significantly different
from 1.0, as measured over the most recent 12-month period.
Notwithstanding the overall diversification of the Program, the Chief Investment Officer
may set limits on any individual Manager’s tracking error and/or contribution to active
risk of the Program.
The aggregate holdings within separate accounts of any security may not exceed 4.9% of
that security’s outstanding shares.
It is expected that each Manager’s portfolio will be appropriately diversified, within limits
established in its guidelines and relative to its performance objectives, to control risk, but without
unduly restricting a Manager’s ability to out-perform its benchmark. That is, an individual
Manager’s portfolio may be more concentrated than is appropriate for the Program’s aggregate
investments.
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APPENDIX 7O
This version: May 12, 2016
Last approved: November 15, 2012
ABSOLUTE RETURN (AR) STRATEGIES
INVESTMENT GUIDELINES
The purpose of portfolio guidelines is to clearly define performance objectives, state the
investment approach, and to control risk. Portfolio guidelines should be subject to ongoing
review. A change in the allocation to the strategy or the Investment Committee’s risk tolerance
can be among the reasons for a guideline review.
Performance Objective
The objective of the absolute return strategy (AR) portfolio is to earn an annualized return that
exceeds the Performance Benchmark (below). The AR portfolio should also provide
diversification benefits to the overall portfolio by offering returns that exhibit moderate
correlation to the performance of other asset classes. The portfolio shall be composed of absolute
return and market directional type strategies.
Portfolio Performance Benchmark
The performance benchmark is the HFRI Fund of Funds Composite.
Portfolio Guidelines
1.
Permissible investments include vehicles that invest primarily in Long/Short strategies
(including U.S., dedicated Non-U.S., short bias, and global equities), Relative Value
strategies (including equity market neutral, convertible bond arbitrage, relative value credit,
and fixed income), Event Driven strategies (including distressed securities, special situations,
and risk arbitrage strategies), and Opportunistic strategies (including macro, CTA and
portfolio hedge).
2.
Investments may be made in vehicles that invest in single or multiple strategies.
3.
Investments may be made in a variety of vehicle structures, which may include: separate
accounts, funds-of-one, comingled hedge funds, funds of hedge funds, and drawdown
structures.
4.
Policy ranges for the strategies are:
Strategy
Range
Long/Short Equity
0-50%
Event Driven
10-50%
Relative Value
10-50%
Opportunistic
10-50%
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5.
No investment with any single manager can represent more than 20% of the AR portfolio.
6.
Gross accounting leverage at the aggregate portfolio level shall not exceed 4.5 times the
market value of the total AR assets. No more than 30% of the portfolio may be invested in
managers who use on average more than 6.5 times gross accounting leverage. Recognizing
the illiquidity of these investments, these constraints should guide the execution of the AR
program, but may be exceeded temporarily between rebalancing. All leverage shall be non-
recourse to the Regents, as trustee of UCRP, with respect to UCRP investments in the
Program.
7.
The Chief Investment Officer may not incur debt to leverage the AR portfolio; however,
portable alpha strategies are permitted.
8.
No more than 15% of the total AR portfolio forecast risk may be derived from any single
manager.
9.
Total AR portfolio forecast risk shall be maintained at a level of no more than 8.0% of total
invested capital.
[Definition] Gross Accounting Leverage: the ratio of the sum of the absolute values of the long
and short exposures of a portfolio divided by the net market value of the total portfolio. Gross
accounting leverage of the AR portfolio is the sum of the individual manager leverage ratios,
weighted by their market values.
[Definition] Forecast Risk: the volatility of forecast returns, as measured by annualized standard
deviation. Forecast risk is calculated using a factor based risk model, which decomposes each
AR portfolio investment’s forecast risk into forecast systemic factor exposures and forecast
residual risks, making adjustments for strategy evolution and various liquidity and valuation
related considerations.
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APPENDIX 7P
This version: May 12, 2016
Last approved: November 15, 2012
REAL ASSETS
INVESTMENT GUIDELINES
The purpose of these investment management guidelines (“Guidelines”) is to clearly state the
investment approach, define performance objectives, and to control risk within the Real Assets
portfolio (“Portfolio”). These guidelines shall be subject to ongoing review.
These Guidelines are applicable to the entire Portfolio consisting of investments made on behalf
of the UCRP and GEP (“the Funds”). The allocation of investments between the Funds will be
managed by the Chief Investment Officer in accordance with the respective performance and risk
objectives of the Funds.
Strategic Objective
The Portfolio shall be managed with the objective of preserving capital while maximizing the
risk-adjusted returns of the Funds through income generation and long-term capital appreciation,
enhancing diversification, and hedging against inflationary risks.
Performance Objective
The primary performance objective of the Portfolio is to generate annualized net-of-fee returns,
after adjusting for risk, which exceed the return of the Performance Benchmark on a consistent
basis over time.
Performance Benchmark
The Committee has adopted the following performance benchmarks for each of the underlying
strategies within the Portfolio:
Strategy
Benchmark
Timberland
IRR-Based Benchmark
Energy
IRR-Based Benchmark
Infrastructure
IRR-Based Benchmark
Commodities
S&P GSCI Reduced Energy Index
Opportunistic
IRR-Based Benchmark
Investment Guidelines
1.
Investments shall be made through limited liability structures such as limited partnerships,
limited liability corporations, and other vehicles. Permissible investments shall include but
are not limited to funds, funds-of-funds, secondaries, co-investments and direct investments,
and may include both publicly traded and private market assets.
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2.
The Portfolio shall adhere to the following ranges:
Strategy
Allowable Ranges
Min
Max
Timberland
0%
50%
Energy
0%
50%
Infrastructure
0%
50%
Commodities
0%
50%
Opportunistic
0%
50%
3.
No single partnership commitment (including co-investments / direct equity investments) can
represent, at the time of commitment, more than 15% of the overall real assets allocation,
defined as the most recent quarter book value plus unfunded commitments plus target
commitment for the current (one) year.
4.
No investment with any single investment manager or general partner can represent more
than 20% of the overall Portfolio.
5.
No investment with any single investment manager or general partner can exceed 30% of that
manager’s total assets under management, up to $100 million. Exceptions to this limitation
may be made by the Chief Investment Officer.
6.
Investments in multiple vehicles managed by the same manager are permitted. However, the
total commitment to these investments (including co-investments and direct equity
investments), at the time of commitment, may not exceed 30% of the budgeted three-year
allocation defined as current book value plus unfunded commitments plus approved
commitment level for the current year and two subsequent years.
7.
The Portfolio shall be diversified across time.
8.
Use of derivative securities by individual investment managers must be specified in writing
in the manager’s guidelines and must be consistent with the Derivatives Policy, Appendix 4.
UNIVERSITY OF CALIFORNIA RETIREMENT PLAN
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APPENDIX 7Q
This version: May 12, 2016
Last approved: November 15, 2012
LIMITS ON THE SIZE OF INVESTMENTS
WITH PUBLIC EQUITY AND FIXED INCOME MANAGERS
There are three broad reasons to limit the size of a management firm (“manager” or “product”)
within an asset class: first, to reduce headline risk, second, to reduce business risk, and third, to
reduce the potential for loss caused by the action of other investors in the product. Unlike
investments in non-traditional asset classes, public equity and fixed income portfolios have
greater transparency and liquidity, and assets are normally held by a trustee. Nevertheless, it is
prudent to be mindful of the Fund’s exposure with individual investment management firms.
To best accomplish these goals, this Policy will primarily be stated in terms of principles and
objectives and secondarily in explicit rules.
Principles
1.
The University of California Pension and Endowment funds (“UC”) desires to retain the
freedom of action to make investment decisions without being unduly influenced by the
actions of other investors.
2.
UC desires to minimize circumstances where the size of its investments results in value
impairment.
Objectives
1.
Each asset class should be diversified across a group of products with sufficiently
dissimilar processes to minimize the possibility of significant concentration in individual
assets. This diversification should consider investment style, strategy, statistical
characteristics, and cross-holding of actual holdings.
2.
UC’s exposure to any single management firm /product should be limited such that an
event which has a negative impact on all investors within the firm/product does not cause
a
disproportional
negative impact on the value of UC’s investment. Thus the size of a
prudent investment must also consider ownership concentration of the
remainder
of the
firm /product’s assets.
Rules
1.
Notwithstanding the above, no investment in a
single product
of a firm shall be more than
25% of the assets of that product, unless mitigating circumstances exist. Such an
exception must be approved in advance by the Chief Investment Officer.
2.
Portfolios managed by staff within the Office of the Chief Investment Officer are exempt
from this Policy.
Definition: a
single product
is defined as (a) the strategy UC invests in plus (b) any other
strategy managed by the same team in the same manner using similar benchmarks.
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APPENDIX 8
This Version: May 12, 2016
Last approved: November 15, 2012
DEFINITIONS
1.
Actively managed: that part of the assets of the Program in which securities are
purchased in different proportions than in the Benchmark in the expectation of earning a
greater return than would be earned by replicating the Benchmark portfolio (“passive”
investing).
2.
Annualized tracking error budget: the amount of active risk which represents a typical
amount of benchmark deviation for a Manager or the Program. The budget is not an
absolute limit, and market conditions may dictate whether a greater or lesser amount of
benchmark deviation is appropriate. The risk budget is normally expressed in forecast
terms, and is compared to realized risk as a principal metric of the stability of a strategy.
3.
Beta: the sensitivity of a portfolio to a benchmark, computed by regressing portfolio
excess returns on benchmark excess returns from the same period. A beta of 1.0
indicates similar return variability as the benchmark. A beta of 1.2 (alternately, 0.80)
indicates that for every 1% increase or decrease in the benchmark excess return, the
portfolio’s excess return increases or decreases by 1.2% (alternately, 0.8%).
4.
Cash equivalents: cash or short-term fixed income securities and an average quality rating
of at least A or equivalent.
5.
CDO, CLO, CBO: Collateralized Debt, Loan, and Bond obligations, respectively.
6.
CMBS: Commercial mortgage backed securities.
7.
CMO: Collateralized mortgage obligation (MBS derivative with unique structured risk
and return characteristics).
8.
Counterparty: One party to a trade legally bound to make a good delivery or a good
payment.
9.
Credit default swap (CDS): a financial contract used to transfer the credit risk of a
reference entity from one party (protection buyer) to another (seller). The protection
buyer pays a premium to the protection seller, in exchange for a contingent payment
following a credit event, such as defaults or bankruptcy.
10.
Derivatives: financial contracts whose value is completely determined by the value of an
underlying security.
11.
Developed Markets: Countries which have achieved an advanced stage of economic
development, whose securities markets have met certain standards for stability, and are
included in one or more index provider’s Developed Markets indexes; to be distinguished
from “Emerging Markets.”
12.
Dollar delta (of an option): a measure of net dollar exposure of an option; defined to be
the option’s notional value times the option’s delta.
13.
Economic Leverage: in the context of portfolio management, is defined as a net dollar
exposure to assets in excess of the dollar amount of invested capital as measured by
current market value
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14.
Effective duration: a quantitative measure of the interest sensitivity of a fixed income
instrument. It measures the approximate change in price of a security given a 100 basis
point (one percentage point) change in the yield to maturity of the security.
15.
Emerging Markets: Countries at varying stages of economic development, whose
securities markets have only recently met certain standards for stability, and are included
in one or more index provider’s Emerging Markets indexes; to be distinguished from
“Developed Markets.”
16.
Equitizing cash: the process of purchasing equity derivatives for the purpose of
maintaining equity exposure.
17.
Equity related securities: includes, but is not limited to convertible securities, preferred
securities, and equity warrants.
18.
Eurodollar deposits: deposits issued in US dollars of foreign banks and foreign branches
of US banks.
19.
Forecast annualized tracking error: the forecast standard deviation of annual differences
between the portfolio return and the benchmark return, based on the current holdings in a
portfolio, and using a particular risk estimation methodology and system.
20.
Global Equity Strategy: an investment mandate based on a global equity benchmark
which includes equity securities of both U.S. and Non-US companies
21.
Gross dollar exposure is defined as the sum of the combined long exposures and the
absolute value of the short exposures, including all physical and derivative securities
positions.
22.
Gross leverage: a term used to indicate that the gross dollar exposure of a portfolio
exceeds the net market value of the total portfolio
23.
Hedging: the process of reducing the possibility for gain or loss over a specific future
period by taking an opposite position, yet not altering the underlying portfolio structure.
24.
IO, PO: Interest only and Principal only strips (CMO variety).
25.
Leverage: in the context of asset class guidelines, means “economic leverage,” not “gross
leverage”
26.
Management costs and fees: for the purpose of the Objective in Part 1, costs and fees
shall refer only to those costs directly incurred by the Chief Investment Officer, either
directly for this asset class or general office expenses allocated to it. It shall not include
other University overhead or allocated indirect costs.
27.
Net Dividends (with respect to a performance benchmark / market index): a calculation
of total return which approximates the minimum dividend reinvestment. The dividend is
reinvested after deduction of withholding tax, applying the rate to non-resident
individuals who do not benefit from double taxation treaties. MSCI uses withholding tax
rates applicable to Luxembourg holding companies, as Luxembourg applies the highest
rates. [definition from MSCI]
28.
Net dollar exposure (of a portfolio): the arithmetic sum of the dollar market values of all
long (positive) and short (negative) positions in securities, plus the notional value of
futures contracts, plus the dollar delta of options contracts.
29.
NRSRO: Nationally recognized statistical rating organization, such as Moody’s or
Standard and Poor’s.
30.
Overlay manager: a manager whose mandate is to manage a specific risk factor, such as
currency, of a group of accounts, each managed by a separate manager. The overlay
manager usually compares the aggregate (net) exposures of underlying managers and
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adjusts those exposures to a pre-determined risk profile, e.g., the currency profile of the
Benchmark.
31.
Portfolio characteristics: attributes of a portfolio of securities, including but not limited
to, weighted average market capitalization, weighted average dividend yield, weighted
average price-earnings ratio, beta with respect to a benchmark, allocation among
countries or geographical regions, sector weights, effective duration, credit quality.
32.
Product Composite: the return on the weighted aggregate of all portfolios managed by an
investment firm using a similar process; see the CFA Institute Performance Presentation
Standards for further explanation.
33.
Prudence Requirement: a requirement of anyone acting in the capacity of a fiduciary, that
they act with the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with like aims.
34.
Realized annualized tracking error: the standard deviation of the monthly differences
between the portfolio return and the benchmark return, using returns from the most recent
12 month period, multiplied by the square root of 12.
35.
REMIC: Real estate mortgage investment conduit (CMO variety)
36.
Repurchase agreement: Sale of a security with a commitment from the seller to buy back
the security from the purchaser at a specified price at a designated future date. A
repurchase agreement is a collateralized loan where the collateral is a security.
37.
Separately managed account: an account entirely owned by The Regents of the
University of California, as Fund trustee, for which investment policies and guidelines
are determined jointly by the Chief Investment Officer and the manager.
38.
Spread duration: a quantitative measure of the credit risk sensitivity of a fixed income
instrument. It measures the approximate change in price of a security given a 100 basis
point (one percentage point) change in the spread (over the Treasury curve) of the
security.
39.
Structured (levered) notes: securities where coupon or interest payments are leveraged,
linked, or indexed to interest rates, index returns, foreign exchange rates, or other similar
variables.
40.
Unhedged benchmark: a benchmark in which the underlying securities’ returns are
translated from their local currency back to US dollars at each measurement date.
41.
Barclays US Aggregate Index: The U.S. Aggregate covers the investment-grade, U.S.
dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-
related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-
throughs), ABS, and CMBS. Issues are Market capitalization weighted. Securities must
have a minimum maturity of one year to remain in the index. Securities must have a
minimum quality investment grade by middle rating of Moody’s, S&P, and Fitch.
42.
Barclays US TIPS Index: The U.S. TIPS Index covers all publicly issued US Treasury
issued inflation linked bonds (linked to the US Consumer Price Index). Issues are Market
capitalization weighted. Securities must have a minimum maturity of one year to remain
in the index.
43.
BofA/Merrill Lynch High Yield Cash Pay Index: This Index tracks the performance of
US dollar-denominated below investment grade corporate debt, currently in a coupon
paying period, which is publicly issued in the US domestic market. The country of risk of
qualifying issuers must be an FX-G10 member, a Western European nation, or a territory
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of the US or a Western European nation. Individual securities of qualifying issuers must
have a below investment grade rating (based on an average of Moody’s, S&P and Fitch).
In addition, qualifying securities must have at least one year remaining term to maturity,
a fixed coupon schedule and a minimum amount outstanding of $100 million. 144a
securities, both with and without registration rights, qualify for inclusion in the Index.
Issues are Market capitalization weighted.
44.
J.P. Morgan Emerging Markets Bond Index – Global Diversified: This index includes US
dollar-denominated Brady bonds, Eurobonds, and traded loans issued by sovereign and
quasi-sovereign entities. The EMBI Global Diversified defines emerging markets
countries with a combination of World Bank-defined per capita income brackets and each
country’s debt restructuring history. Issues are Market capitalization weighted but the
index limits the weights of those index countries with larger debt stocks by only
including a specified portion of these countries’ eligible current face amounts of debt
outstanding. The maximum weight to a country is capped. Securities must have a
minimum maturity of one year to remain in the index.
45.
J.P. Morgan Global Bond Index - Emerging Markets Global Diversified [GBI-EM Global
Diversified]: This index is a comprehensive Emerging Markets debt benchmark that track
local currency bonds issued by Emerging Market governments (14 countries from Asia,
Europe, Latin America, and Middle East/Africa). Countries are eligible for
inclusion
as
long as they are classified as having a low or middle per capita income by the World
Bank for at least two consecutive years. Markets with capital controls are not eligible.
Issues are market capitalization weighted but the index limits the weights of those index
countries with larger debt stocks by only including a specified portion of these countries’
eligible current face amounts of debt outstanding. The maximum weight to a country is
capped at 10%. The excess is redistributed to those countries that have a market
capitalization of less than 10%. Securities must have a minimum maturity of one year to
remain in the index.
46.
Citigroup Large Pension Fund Index: This index provides an appropriate benchmark for
pension funds seeking to establish long-term core portfolios that more closely match the
longer duration of their nominal dollar liabilities. Issues are Market capitalization
weighted; sectors have fixed weights. Securities must have a minimum maturity of
7 years (non mortgage); one year (mortgage) to remain in the index. Securities must have
a minimum quality BBB-/Baa3.
47.
Citigroup World Government Bond Index ex-US: This index contains Sovereign debt
denominated in the domestic currency (23 government bond markets: of Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan,
Malaysia, Mexico, the Netherlands, Norway, Poland, Singapore, Spain, Sweden,
Switzerland, U.K., and U.S.). Issues are Market capitalization weighted. Securities must
have a minimum maturity of one year to remain in the index. Securities must have a
minimum quality A-/A3.