UC to Diversify Stock Pickers

Those who can, do. Those who can’t, hire out.

That seems to be the message from the University of California’s regents when it comes to picking stocks. They have decided that UC’s in-house investment staff should no longer manage a big chunk of the system’s $47.4 billion in pension and endowment assets.

The UC system disclosed Tuesday that it will hire outside money managers to handle $13.8 billion of domestic stock assets, taking those funds away from in-house staff.

Most major public pension funds rely at least in part on outside experts. By contrast, UC had long opted to go it alone. But the system’s stock pickers didn’t earn a passing grade: The staff-run U.S. stock portion of UC’s employee retirement fund trailed market benchmarks in the 12 months, five years and 10 years ended June 30.

In the 10-year period, for example, the UC fund’s stocks gained an average of 10.3% annually. That trailed the 11.6% average return of the fund’s benchmarks, which had been the Standard & Poor’s 500 and currently is a version of the broader Russell 3,000 index that excludes tobacco stocks (adopted as the target in June 2000).

“The decision was based on a lengthy review of the portfolios, on the basis that they have under-performed,” said UC spokeswoman Abby Lunardini.

She said the funds have been under scrutiny for about 18 months, since David Russ became the system’s treasurer. Russ had been an investment manager at the University of Texas and before that oversaw a portfolio for Pacific Telesis, now SBC Communications.

The UC shift also will mean diversifying from a large-stock strategy to a range of equity strategies, the treasurer’s office said. The greater diversification and the use of multiple outside managers are aimed at limiting risk as well as improving performance, the office said.

For a public fund, managing money in house can be less expensive than contracting with outside managers. But any savings can be wiped out if the portfolio’s performance is sub-par.

In UC’s case, weak returns in the long run could limit the fund’s ability to pay pension benefits or supply resources for the system’s expansion.

Many other public pension funds, including the California Public Employees’ Retirement System, have long used outside managers to handle at least a portion of assets. “We’re kind of an anomaly,” Lunardini said.

The New Jersey and Texas state pension funds are among the few large public funds run exclusively in house, experts said -- although New Jersey is reconsidering that decision in the wake of recent heavy losses.

“Because it is not the common practice and there are so many outside managers available that can make a compelling case for themselves, the pressure on funds that still rely on internal management is great,” said Chris McNickle, managing director at Greenwich Associates, an investment consulting and research firm in Greenwich, Conn.

“It’s particularly easy in the current markets to make mistakes that really hurt” a portfolio, he added.

UC’s decision comes amid the worst bear market in a generation -- and amid predictions that smart stock picking could be a difficult challenge for several years because of the murky economic outlook and still-high valuations of many shares.

It isn’t certain that outside managers can do better than UC’s in-house staff, of course. But that won’t stop firms from bidding for the potentially lucrative UC contracts.

Sources said bidders could include major players in the pension arena such as Barclays Global Investors, J.P. Morgan Chase & Co., Fidelity Investments, Morgan Stanley and Wellington Management Co.

At UC, the change will cost the jobs of nine of the system’s 26 investment management professionals, Lunardini said. Two of the displaced managers already have landed other jobs, she said.

At a meeting in January, the regents will spell out the criteria for selecting outside managers, Lunardini said. In the interim the money will be stashed in the Russell 3,000 tobacco-free index fund run by State Street Global Advisors, which already handles the 30% of stock assets that UC invests “passively” -- that is, simply to match major indexes.

Of the money being shifted, $11.4 billion comes from the system’s defined-benefit pension plan, $1.4 billion from endowment pools and $1 billion from the 403(b) retirement savings plan.

UC apparently will continue to manage its bond investments in house. The bond team has beaten its benchmark indexes over the last 10 years, UC said.