Evaluating UCRP Investment Returns
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چکیده
There has been considerable public discussion of the investment performance of the University of California Retirement Plan (UCRP). Much of that discussion has been based on simple comparisons of the realized investment returns of UCRP to those of other pension plans, such as CalPERS. Such comparisons provide no economically meaningful or statistically significant information about the quality of investment management. The most significant factor in determining the investment return of a portfolio is the allocation of the portfolio among the various asset classes, and the realized returns of those asset classes. The returns of the asset classes in a given time period cannot be predicted in advance, so that portfolios with different asset allocations will exhibit quite different realized returns in different time periods. The effect of the asset allocation should be factored out by comparing the realized return of each asset class within the portfolio to an appropriate benchmark for that asset class. The realized return in each asset class should closely track the class benchmark; this has been the case under the current investment policy adopted by The Regents and implemented by the Office of the Treasurer. The evaluation of active managers should decompose the realized return into components, in particular the return due to stock selection and the return due to market timing. The evidence indicates that market timing leads to persistent underperformance. It is easy to document persistent underperformance due to stock selection, but the evidence indicates that superior past performance due to stock selection may be persistent. The Office of the Treasurer considers the decomposition of investment returns in evaluating active managers, and has replaced managers based on this evidence. There is no “right” asset allocation for a pension plan; the choice depends on many considerations, so we should expect different pension plans to have different asset allocations, and consequently different returns over different time periods. Although the Academic Senate has not attempted to do a thorough evaluation of UCRP’s asset allocation, the allocation seems appropriate, given UCRP’s characteristics.
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