Office of the Chief Investment Officer of the Regents Broke the Financial Markets The Day Coronavirus Nearly THE WALL STREET JOURNAL May, 2020 threatened the viability of America’s companies and municipalities The March 16 stock crash was part of a broader liquidity crisis that Foreign Students Sour on America, Jeopardizing a $39 Oct. 2019 ‘It’s ridiculous’: People Billion Industry. For the past six years, UC Investments 'What will you tell your children?': They provide critical revenue Gas prices spike Around Greta Thunberg blasts climate to U.S. universities. But the inaction at Davos. Greta Thunberg administration’s immigration above $4 in the World has worked to make sure we were ready told a World Economic Forum panel on crackdown has them going 201Lowe’s to lay off thousands9 of workers— as it outsources2020 their duties ¶ The home-improvement News climate that activists were demanding an elsewhere. ¶ Last May, Luis Carlos Soldevilla graduated with one SF & California Are Panic- chain, based in Mooresville, N.C., declined to say exactly how many employees were affected. But the Wall end to all investment in fossil fuel of the best grade point averages in his Mexico City high school. Street Journal reported that thousands of employees were told this week that their jobs were eliminated, to support the university when the exploration and extraction, calling for a For his senior project, he even tackled Goldbach’s conjecture, a Buying … which the company confirmed. ¶ Lowe’s spokeswoman Jackie Pardini Hartzell said Thursday that the cuts drastic reduction of emissions to zero. famous number theory problem. Soldevilla considered attending Toilet are coming as the company moves to third-party assemblers and facility services to allow store associates to longest-running market expansion in She dismissed some of the measures Boston University and the University of Washington, both of spend more time on the sales floor serving customers. Previously, some store workers did assembly work, mooted by governments and companies, which had accepted him. He also had fond memories of the CORONAVIRUS Paper? such as constructing floor models, and janitorial work. Hartzell said that employees in these positions will such as planting billions of trees to University of California, Berkeley, where during the summer of FALLOUT THREATENS have the opportunity to apply for other open roles at Lowe’s. ¶ She said the company is not disclosing how history came to an end. capture carbon dioxide from the 2016 he took a computer science course.But instead of enrolling AUTO INDUSTRY’S March 2020 many are affected as the number of employees affected varies by store and the company has a strong track atmosphere. Her comments came after at a U.S. school, Soldevilla started this fall at the University of SUPPLY CHAIN record of retaining associates in other roles within the company. (The Washington Post, August 2019) Donald Trump announced the US Toronto, Mississauga, where he’s pursuing a double major in joined the global one trillion tree computer science and mathematics. Why did he pick the Canadi- PUBLISHED FEB   initiative. (The Guardian, Jan 2020) an school over those big American names? (Bloomberg, Jan ’19) STOCKS JUST HAD THEIR BEST WEEK IN This year, we faced a crisis of epic DECADES. NOW COMES THE DROP. China Deals ‘Body Blow’ to Struggling Telling investors to sell now, in U.S. Farm Belt — The U.S. Farm Belt 2019 the midst of the coronavirus proportions, in the markets and beyond. right reasonsos. J a take on more debt — for the it’s acceptable for the U.S. to Economists increasingly say braced for deeper pain from the crisis, feels a bit like yelling escalating trade battle between the fire in a crowded room—even if And it’s not over yet. there are no crowded rooms anymore. after talks world’s two biggest economies after Still, it feels like the right China said it would suspend all thing to do. ¶ We’re not being imports of U.S. agricultural goods. bearish for bearishness’ sake. in China’s move will a„ect farmers fact, we’re optimists by nature. Although no one knows where we’ll The market goes up over time, after raising fuzzy green soybean pods in all, and history teaches that it Illinois, milking cows in California pays handsomely—especially in a land, because of our steady nuary 2020 and feeding hogs in North Carolina, retirement account—to keep the . 2, 2019 all of whom have seen business su„er faith. But one of the things about leadership, strong partnerships and the Covid-19 crisis is the speed at Berkshire Hathaway’s as a result of tari„s that Chinese which things happen. It has been ožcials implemented last year. GM workers strike on pay and benefits break down breathtaking...(Barrons, April ‘20) Cash Pile Hits a Record Sept strategic creativity, we’re ready. (The Wall Street Journal, Aug 2019) A ug 2019 – Trump says it doesn't matter if the US ha a recession because the trade war is more importan SOMEBODY FINALLY TOLD WALL STREET THE WORLD IS ON FIRE. While the rest of OCTOBER, 2019 us have been feeling every bump, pothole and rumble strip on this godfor- Corporate saken road called 2020, Wall Street had, for weeks, seemed to float above America it all, blissfully unaware. That ended today. (CNN Business, June 2020) Trade War Pause Leaves Few Happy Says Black The Great Coronavirus Crash of 2020 Is Di erent (Bloomberg, Mar ) Lives Matter. The Great Coronavirus Crash has been frightening in its speed and breadth. Stocks have lurched lower worldwide, with brief It Needs rallies between the falls, like wounded bulls in a corrida. to Hold Up Through 1 p.m. on March 18 the S&P 500 index was o„ 27% for a Mirror. GE Moves to Cut Roughly 13,000 中 the year to date, Germany’s DAX was down 38%, and Japan’s — Aviation Workers Nikkei was o„ 29%. In the credit market, investors have ’ed —˜™š 2020 — 因新冠疫情 ， 中国东 May 2020 junk bonds. Even U.S. Treasury bonds—traditionally a safe harbor in crisis times—have come under pressure, possibly because investors are selling them to cover losses elsewhere. First major Chinese airliner suspends flights to the United States over coronavirus outbreak (Feb 2020) UK will plunge into recession if it 航暂停往返美国航班 FED CHAIR POWELL SPEAKS AND OIL PRICES SURGE, leaves Europe without a Brexit 美 million people abruptly lost their jobs, wiping out LEAVES INVESTORS EXPECTING American Airlines extends STOCKS FALL deal. (CNN Business, 2019) Chevron Will Write Down Assets a decade of employment gains in a single month. A RATE CUT Boeing 737 Max flight AFTER U.S. KILLS The UK Office of Budget Respon- by at Least $10 Billion. Chevron 73 U.S. UNEMPLOYMENT The speed and magnitude of the loss defies cancellations through early IRANIAN GENERAL sibility (OBR) warned Thursday says it will book a charge of at least that "heightened uncertainty and comparison. It is roughly double what the nation PUBLISHED JAN   $10 billion because lower long-term September. The airline, which declining confidence" would deter RATE SOARS TO 14.7%, experienced during the entire financial crisis is the largest U.S. carrier, said investment while higher trade prices for oil and natural gas are from 2007 to 2009. ¶ As the virus’s rapid spread the cancellations would affect barriers would slam exports. making some projects less valuable. THE WORST SINCE accelerated in March, President Trump and a "These push the economy into number of state and local leaders put forth 贸 approximately 115 flights per day. (U.S. News, December 2019) recession, with asset prices and THE DEPRESSION ERA restrictions that led businesses to suddenly shut American previously announced the pound falling sharply," said 20.5 million people lost their jobs in April, the down and shed millions of workers. Many £

the government's budget watchdog. ¤ in April that it would cancel flights ¥ Labor Department said Friday. Many analysts businesses and households also canceled all ¦ UK stock markets would fall 5%, Why the Global § on the 737 Max through Aug. 19 due UC INVESTMENTS — MADE FOR THIS MOMENT , 2020 believe it could take years to recover. ¶ The U.S. travel plans. Analysts warn it could take years to while the pound would plummet Coronavirus unemployment rate jumped to 14.7 percent in return to the 3.5 percent unemployment rate the to the Federal Aviation Administra- 10%. GDP would shrink by 2% by April, the highest level since the Great Depression, nation recorded in February, in part because it is the end of 2020. tion’s mandatory grounding of the 1 Recession Could as many businesses shut down or severely curtailed unclear what the post-pandemic economy will The report is a stark warning Boeing jet. (Fox Business, Sept. 2019) operations to try to limit the spread of the deadly look like, even if scientists make progress on a s t 易 ahead of October 31, the latest Last a Long Time 7 deadline for Britain to depart. coronavirus. ¶ The Labor Department said 20.5 vaccine. (The Washington Post, May 2020) 战 STRONG DYNAMIC THE UC STRATEGIC LEADERSHIP PARTNERS INVESTMENTS CREATIVITY WAY

04—15 16—29 30—61 62—94

Statement from CIO Q&A: Ron O'Hanley Made for this Moment Challenge Grows Creativity Jagdeep Singh Bachher from State Street Our 10 Pillars What Happened in Statement from President the Markets Q&A: Doug Leone from The Greatest Wealth Janet Napolitano Sequoia Capital is Health Overview Q&A: Regent Richard A Nobel Cause Endowment Sherman A Transformational Pension Approach to 21st Century Working Capital Investing Blue & Gold Pool Risk Management Fiat Lux Insurance A Brave New World, by Neil Brown Meeting the (Next) Moment Q&A: Arthur Guimarães UC Regents & Officers from UC Investments UC Investments Staff Retire Better

2 3 STRONG LEADERSHIP

5 6 Chief Investment Officer Jagdeep And though we never knowquite what 11th year market abull 11th of — the longest Every year brings newchallenges and Regents, thepresident theUniversity of Drake, andhuge congratulations on I’m that her confidentandhopeful Capital Strategies Committee, are keen Chair John Pérez A. andRegent Hadi Makarechian, chair theFinance and of UC aphenomenal president, has been we were enjoyingthe cruising along, will follow asimilar path.Welcome, Dr. always challenging meto do better. ago into today’s agile, innovative and around ideas. advisors, always available to bounce leadership team,andourentire staff. leader and partner inhelpingleader to andpartner last through 2020. been supportive andsteady, supportive been while from the start. With hiscalm With andsteady from thestart. over this tumultuous pastyear.over thistumultuous We our university thrives. of California, my California, of UC Investments outlier of epic proportions, forand us epicproportions, outlier of crisis,of there’s noonebetter to turn demeanor, inspired hehasboth and geo-economic challenges bythe posed geo-economic couldn’t do what we did—andcontinue heart a people business. apeople That hasheart combine to results produce that ensure collaborative organization. Shehas aclosehas been andinvaluable partner his long andstoried history withUC, crisis. TheDow, andNASDAQ S&P structure anchoredstructure bytheUC Board of successor, Dr. Michael V. Drake, with scrambled to alter theirassessments to dogovernance —withoutasolid investment strategies. We are at the fancy algorithms, andthenovel to —investing’s expect like that —our10 isolated Iencountered office six years transform UC Investments from the is steppingdown after seven years as the Regents’ Investments Committee, in history — and fully expecting itwould expecting in history —andfully the world. thefiscal Atof year, thestart taking onthisrole at such apivotal time. to for guidance andadvice. AndBoard in response toin response theunprecedented investor, andmanager risk expert lockdown,into virtual every economist, never more been evident to methan at UC Investments.new opportunities mentored me, intimes andespecially more nefarious plans. Asthe world went pillars, ourpeople, andourpartnerships The novel coronavirus, however, had anThis pastyear been hascertainly Janet Napolitano, who asIwrite this Ignore for aminute allthenumbers, Regent who Richardchairs Sherman, And in the midst of thisdevastatingAnd inthemidst of 10 UC Investments pillars served us With higher education being one of the oneof highereducationWith being We can’t sugarcoat it:Thepandemic NASDAQ up27percent. jumped Not asingle onmy person leadership year andwoke uponJune 30, to 2020 years crafting of andimplementing our very well, allowing to us stay grounded was clear cash was kingagain. the went off rails. Oil prices plummeted we made sure theUC system hadthe were awake for thewhole mindboggling weather chaotic thisperfectly storm with with 11 years marketwith 11 abull of turning will arrive. what a“new normal” orwhen it willbe a “keepcalm andcarry on” vibe.Infact, as little disruptionto ourbenchmarks reviewedalso every asset inevery class andthea mere halfpercentage point, and work from strength, notdesperation. and abroad. are These times for the as possible. long timeto have classrooms halfempty. looked like over thepastfiscal year. from theyear before, theDow was down for thenext two years. Two years isa government dollars poured trillions of operating liquidity itneeded while we 500was up7.5dream. TheS&P percent have like on aTuesday.) at been, 3a.m. check themarkets, you’d thinkaglobal high unemployment, thebankruptcies high unemployment, could affect ouruniversity’s operations history books, andwe reallyhistory books, don’t know have played havoc withpeople’s lives. sectors hithardest bythepandemic, that have if you’d asleep the whole fitfully been into theeconomy, themarkets took on to slash interest rates andthefederal to negative $40abarrel. Andasgold thing (even when we really shouldn’t to ensure we were well to positioned into a bear in 19 daysinto in19 abear —have been than asteady handonthewheel. The team panicked; instead we teamed up. that have hitsmallbusinesses marched slowly butsteadily upward, it more important in times of upheaval intimes of more important reckoning over systemic racism at home millions, we are facing along overdue particularly hardparticularly andtheentire industries pandemic have mightjust abad been profound. More important, therecord-profound. More important, pandemic that hassickened andkilled STRONG LEADERSHIP As theFederal Reserve moved quickly The shocks andglobal to US markets Here’s what has ourday-to-day Of course at UC Investments, we essentially been putonice, been essentially

— There’s nothing Strong Leadership —

— 7

Two years is a long time to house a find solutions no one could envision to single student in a three-person dorm a crisis no one could predict. We’ve had “I am optimistic room. Two years is a long time to go to be agile. We’ve had to pivot. (And about the future without watching a UC football or yes, we’ve had to do all this with our basketball game. But in the context kids and our dogs creating a ruckus on because human of a 152-year institution that’s gone Zoom calls.) beings are innovative. through the 1918 influenza pandemic, When faced with adversity, we multiple wars and the Great Depression, persist. We don’t hunker down, taking We are creative. two years is just a blip. So leadership comfort in our spreadsheets and in these times is about engaging, checklists. We create opportunities We are tenacious. and listening and learning. And that where none existed, and at a scale And when faced includes learning and openly discussing we’ve never dreamed of before. For things about which we may have been example, during this crisis, we doubled with adversity, we silent before, such as what we can do to down on environmental, social and fight racism, exclusion and neglect. It’s governance (ESG) commitments, find creative solutions about having the humility to recognize achieving our objective to free our that will get us you will be wrong. But we know that to portfolios of fossil fuel investments fulfill our duty as long-term investors, and surpassing our five-year goal out of this crisis.” we have to stay steady, stay strong and of investing $1 billion in promising JAGDEEP SINGH BACHHER stay creative to provide the financial clean energy projects. As of the end of stability our system needs to emerge June, we’ve invested $1.5 billion with from this crisis and be stronger for it. African American, Latino and women managers, and over the next four years, DYNAMIC PARTNERS — As much as we will invest another $2 billion with the days might look uncertain right diverse investment firms. We recognize now, we know that the six years we’ve that being intentional about diversity by invested in building and strengthening being open-minded and looking where our partnerships is helping us as we we haven’t before is the only way to work to steer through this crisis. UC achieve results. We’ve also committed is a massive engine of innovative to connecting promising students from ideas, known for finding solutions to different backgrounds with our most the biggest problems on Earth. One significant investment partners, and of our strongest advantages is that working with the 10 UC chancellors to we can partner with our outstanding create a pipeline of underrepresented community. Our people — 300,000 talent, today’s students who will students, more than 227,000 faculty become tomorrow’s finance leaders and staff, some 2 million living alumni and entrepreneurs. — populate an innovation ecosystem for which UC is world-renowned. In last year’s report, I said that the real Inspiration born of the current crisis test of any leader doesn’t come when will ultimately translate to ways to things are going well; that leaders better our lives, our environment, are measured by how they lead when and our collective future — and in things turn bad. All of us have been put these transformative ideas we hope to the test this year, and I’m so proud to invest. We’re not merely reading of how our office has come together to about ideas in a research report or on help lead the University of California a computer screen. We have human- through this unprecedented time. It is to-human interactions and tap into a not easy, and it’s not comfortable. vast breadth and depth of knowledge At UC Investments we believe the that’s unmatched. This past fiscal year, ongoing crisis will translate to markets we interacted with everyone we could that will generate overall lower returns and made ourselves available in every in the short to medium term. We have way we could. We also created stronger been working with the Board of Regents partnerships within our own office, and among ourselves to determine working together — virtually — like the appropriate asset allocation for never before, an effort enabled by the the uncharted territory ahead. We’re dynamic data tools we’ve invested in holding on to our hats, and looking that allow us to respond to the ever- forward to the ride. It is our bold shifting challenges in real time. creativity that will pay the dividends of emerging from this and creating a new STRATEGIC CREATIVITY — One of our 10 and better way of living in the world. pillars is Creativity Pays. And this year We are steady, strong and strategic — it was the guiding light as we worked to and we’re here for the long term.

8 Strong Leadership — 9 10 10 President, University of California Janet Given thepandemic we’re going through I endmy tenure asthepresident the of Bachher andtheUC Investments team acommunity of apart to proud be I amso For example, we froze salaries for our Early in my presidency, Iannounced my University California. of work that to isessential ourmissions of with theinvestment Iknowhe’s portfolio. we don’t want to let thebudget exigencies worked to make theacademy-to-market world, butnotiftheystay secreted behind and themyriad unprecedented of and boundlesscreativity ourstudents, of are particularly notable because of the are notable of particularly because are going to have to do more things like and Itooka10%cutinoursalaries. We are incredible. just But whether it’s a and faculty are doing andcreating lifetimes. to continued carry out They’ve lasting damage to theinstitution. lifesaving piece agame-changing drug, keeping motivated people agile andbeing faculty andstaffin rising to meet one for theUC community. I’m continually future because protecting the corpus of of protectingfuture because thecorpus decisions we’re having to make inreal of themosturgentof challenges our of goal makingUC carbon of neutral by 2025, got theshort-term andthelong-term both over thenext two orthree years create existing engineering problem, UC-grown oraradical software of newsolutionto an ischampioningof entrepreneurship and had to make hard choices to contain costs. commitment to address climate change. solidly inmindashemakessolidly decisions, and time, there’s quite alot to thinkaboutas this time. that of isunited bysuch adeep sense teaching, research andpublic service, and impressed bythestrength,resilience it’s even more precarious this year — we’ve the stabilityouruniversity. of Given the terrificof people job informed, keeping the university isourhighest priority, and that across thesystem for theforeseeable the walls of our campuses. And so I’ve Andso the wallsourcampuses. of innovations have the ability to change the innovation at UC.Thethings ourstudents massive importance of theirwork of tomassive importance purpose andcommitment to actionduring purpose policy-covered staff,policy-covered andthe chancellors precarious nature state of funding—and process more efficient. Another area pride of isour The efforts made by The efforts Jagdeep Singh Jagdeep andhisteam have done a NapolitanoBut place ismy agood to gratitude start one of thethingsone of I’m mostproud on thebigger picturemy of tenure, that’s right where we needto be. But takingastep back to reflect And ifyou paidattention to oilprices As auniversity, we are notabigfan of And today, we’re makingreal progress we hadteams asudden, ononeAll of At thesame time, we have our surpassed (DACA) program, which I created when I Trump administration’s plan to dismantle When thecongratulation texts started I’m Ihaven’t proud afraid been to take on DACA couldfinallybreathe students a huge years my of tenure andsay it’s lively. been victory, butinthemeantime, our allof five-year ofinvestinggoal $1billionin were actuallygenerating greater returns. was very creative. Ifwe want to de-risk our when it’s notpopular. we realize it’s likely onlyatemporary Homeland of was Security Department and just bystatingand just that goal, itmobilized and Iknowthat astheleaders thenext of legacy thanthat. by theresilience, they strength andpoise Supreme Court decisionSupreme that Court blocked the fuel industry out of it because renewables itbecause industryoutof fuel fossil Ithought fuels. theway Jagdeep didit for what’s even right, when it’s and difficult energy portfolio, we hadtoenergy take thefossil portfolio, butwedivestment, wanted to get outof makingourinvestmentsof fossil-free. green powerthanany otheruniversity in of myof tenure, UC graduated itslargest and even when others thought were theissues generation innovation of andservice, dark year came onJune withtheU.S. 18 changing how theydesign ourbuildings. collaborated to create 10scalable solutions Wecampuses. faculty had56 members who campus working withteams from other can do it, so can otherlarge, so can do it, complex so much throughout activity so thesystem. showed during challenging these times, it’sservant, inyourto take blood astand sigh of relief.sigh of It was arighteous moment. secretary under President Barack Obama. the nation. toward getting there: We more produce to address climate change. We hadpeople that andwhen matteryou’re most, apublic bigtotoo solve. it’s Because issues these the hard challenges andthat Ipersisted they’ll do us proud. There’s do proud. us they’ll nogreater of thisinvestment the benefits strategy. this year, you’ll we’re see already reaping the Deferred Arrivals Action for Childhood tide onclimate change. institutions —andtogether, we can turnthe most diverse class ever. I’m blown away pouring inatIwaspouring thrilled. 7am, Ofcourse, promising clean energy projects. If UC Another shining lightinthisotherwise In May, weachieved also themilestone I finditfittingthat during thefinal year I hope people lookback people I hope onthelast seven Strong Leadership —

11 11 12 12 UC Board of Regents, Chair of the Investments Committee Q&A: Richard Sherman Jagdeep andhisteam we’ll rewarded be for it. want to characterize it(which we may world isturningaway from fossil fuels we realize also that it’s that important well for everybody. specific Interms of as aleader inthiscrisis? alternative sources indemand, rise Ithink alternative sources energy. of Asthose about thefinancial decision we made agree bytheway), with, we shouldn’t and among the partners we workand amongthepartners with? area timeago, some andourinternal allocation has been beneficial; allocation beneficial; wedidn’t hasbeen a fairly significant positioncash relative later. Having amore significant cash been measuredbeen abouthischoices and keeping asteady the handandbeing becomes too risky.becomes too We’re long-term investingbe That asset inthisasset. but itgot putto work. Andthat’s fine; we free fossilinvestments of fuel for along from anenvironmental standpoint, dispositions. In hindsight, we may Inhindsight, dispositions. have changesof inassets,acquisitions, or opportunistic coming out of theMarch coming outof opportunistic low, don’t have first to be outorfirst backin. of increasingof diversity, equity and hasn’t made any drastic moves interms calm leader theorganization needs. He’s choose tointhisarenachoose participate through had more cash thanwouldhave been diversity thecommunity of we diversity But across allthe spectrums. office reflects our work toincrease oriented; assetselectionisthepurviewof theregents.of We’re asset allocation- have to liquidate It positions. worked out cash andthenstarted inthebeginning inclusion, intheUC Investments both office investing. What was your committee’s ourlives,in every of including aspect time, andinMay 2020, that milestone was to nolonger assets andto own those investors, not traders. Ifeel very So good mindset aboutinvesting during this the managers we invest withreflect the investment decisions, that’s notthejob itto work of to putsome amonthorso the equity rally before thepandemic had to ouroverall assetallocation because reached. How do you feel aboutit? unprecedented time? run long andfar. We maintainedthat political standpoint orhoweverpolitical standpoint you Q

:

The pandemic hascreated uncertainty Q Q Q RS RS RS RS

: : :

You’ve UC being of supportive been How do you thinkJagdeep hasdone Could you talk about the importance youCould talkabouttheimportance

: : : :

To me, makes itjust Ifthe sense. Jagdeep hasdone very well at Coming into thepandemic, we had We inthis ourefforts started . Strong Leadership —

13 13 serve — our students, our professors and debt of the university in addition to our I’m very proud of the our staff. Data also show that having pension obligations—and so Jagdeep will diverse managers is good from a financial be a valuable advisor to the Office of the close and collaborative standpoint, and as with selling our fossil President and the chief financial officer. fuel assets, our decision to increase the Q : You’re starting your fifth year working relationship diversity of external managers is the right as chair of the Investments Committee. I’ve had with Jagdeep all investment decision, too. Looking back beyond just the last Q : A recent analysis by Cambridge fiscal year, what would you say you’re along the way. It’s very Associates shows that UC’s endowment is proudest of? one of the top performing in the country. RS : I’m very proud of the close and much a true partnership, In addition to our asset allocation and collaborative working relationship I’ve and I think it’s worked investment strategy, how do you think the had with Jagdeep all along the way. It’s culture of UC Investments plays a part in very much a true partnership, and I well. He and his team these results? think it’s worked well. He and his team RS : When I interact with the people in are doing a great job in a very difficult are doing a great job the office, it’s clear that it’s a very inclusive environment these days. in a very difficult and collaborative environment. Though Q : In the current investment Jagdeep makes the final decisions, of course, environment, would you say this close environment these days. everyone in the office has input into these working relationship is more important RICHARD SHERMAN decisions; you get the best thinking from than in less turbulent times? a group of the best people. And you can’t RS : When you’re managing over argue with the results. They’ve done better $100 billion — including a pension that than their benchmarks fairly consistently. hundreds of thousands of our current and Q : We know you’re a big proponent of former employees rely on — it’s never not investing in the ideas coming out of the important; it’s an enormous responsibility. UC system. What opportunities do you see And looking at probable state funding right now? cutbacks, our endowment will be crucial RS : We have a tremendous knowledge as a means to supplement funding that’s base on our 10 campuses, and the research not necessarily a guarantee going forward. teams here are among the best in the That’s about as important as it gets. world. We’re working to make sure we’re aware of all of the innovations coming out of our system so we can be positioned to be the first investor on projects from our own “family.” As I have said before, we should “eat our own cooking.” Whether it’s in medical research, engineering or technology, we want to invest in those that have the most promise. We don’t always have to take the entire investment, but we should be the lead on it. Plus, there is a certain amount of herd mentality in the private equity space, so if UC Investments puts money in something, it’s going to be a calling card going forward for that particular group to raise more money. Q : The regents just announced Dr. Michael Drake as our new president at one of the most challenging moments in the history of the University of California. What would you say to Dr. Drake about the role that Jagdeep can play on his leadership team and how UC Investments overall can help the university achieve its goals? RS : Especially over the next 12 months, UC Investments can help the new president by marshaling the financial assets of the entire system, creating liquidity and helping monetize some of the assets that are created out of the system. There have been a lot of discussions about looking at the outstanding public

14 Strong Leadership — 15 DYNAMIC PARTNERS

17 �2

18 Dynamic Partners — 19 RON O’HANLEY — Chairman & Chief Executive Officer State Street Corporation

State Street is among the world’s largest providers of investment services to institutional investors, including investment servicing, investment management, investment research and trading. It is also UC Investments’ single biggest partner. Out of our total $130 billion in assets under management, State Street is responsible for managing $59 billion of it — 91 percent of it in index strategies and 9 percent in active strategies. State Street is also our master custodian, providing accounting, performance and analytics, alternatives administration, agency lending, FX and transition management services. Chairman and CEO Ron O’Hanley sat down to talk with us about the current investing climate and what we’re learning from this unprecedented year.

20 Dynamic Partners — 21 A global pandemic. Massive fiscal stimulus since then, and in fact, many public plans and instill a high-performance corporate more prevalent in the service industries. at home and abroad. A disconnect have promised additional benefits to those culture when we encounter new colleagues In all areas, I think innovation will come between Main Street and Wall Street. already in retirement. as squares on a screen as opposed to from this intersection of the machine What are the most important lessons the But this economic crisis may be the teams sitting around a conference table or and the human. You can see it in action financial industry should take away from tipping point at which we finally say, “We’ve gathered around the coffee machine. across the UC campuses: you’ve got the events of this year? got to make some changes here.” I don’t I also worry about the pace of innovation great machines and even greater minds RO’H : I think the main lesson from the see a way of fixing public pension plans in a virtual world, because by definition programming the machines. There are crisis is the importance of resiliency. I’d without everyone giving something up — innovation requires looking at old going to be so many more opportunities look first to operational resiliency, where beneficiaries as well as taxpayers — and problems in new ways. Without effectively and innovations there. 90 percent of financial services workers instituting some kind of proportionate assimilating new people — or people new In fact, the crisis is driving a great worldwide had to transition to working sharing of risk. Personally, I think we ought to the problem — into the mix, problem- experiment at UC and other universities in from home virtually overnight. The second to use this crisis as an opportunity to fix solving will be harder. Ultimately, I don’t terms of education during a pandemic. aspect of resiliency is liquidity. Many pension plans, not do away with them. see the world moving to permanent work I think there will be some great innovations investors found themselves caught short Q : After this current crisis passes, what from home, but I think you’ll see much as a result in how institutions teach and in terms of the amount of liquidity they changes do you foresee in the way people more flexible arrangements, which is great how students learn. had available relative to what they needed. work and in the way people invest? for all kinds of reasons: time management, Q : The financial industry seems to When looking at Main Street businesses, RO’H : First, as an institutional investor, the easing of traffic in major metropolitan finally be waking up to the importance of it only took a week into the crisis to start particularly an asset owner, you need areas and greater flexibility with housing ESG. What is State Street doing around hearing talk about business failures. So the to make sure you have enough liquidity prices. I must say that what I’ve seen diversity, equity and inclusion? crisis has shown that the whole economic to rebalance back to your policy asset from our employees in this rapid shift to RO’H : In terms of incorporating system is probably less resilient than it allocation should you wish to do so. work from home has been truly heroic. As environmental, social and governance should be. Many businesses are built and Second, I believe there will be a greater always, they prioritized taking care of our issues into risk analysis and investment capitalized assuming very high capacity focus on capital resiliency as opposed to clients even under the most extraordinary frameworks, I think the industry has utilization. When volumes and demand fall capital efficiency alone. You can’t predict circumstances. recognized that these are material to sharply, failures loom. black swans, other than you know the Q : One thing we’ve learned in this crisis a company’s ability to generate long- The other lesson is the importance of unexpected will happen. Take the airline is that without data, you’re dead in the term value. ESG is a great framework expertise. We’re paying the price for not industry: they’ve had a black swan every water. Is State Street looking to increase its for thinking about long-term risks and having sufficient expertise, particularly decade of this century — 9/11, SARS and investment in data? opportunities. The pandemic has only public health expertise. Now, we are paying now Covid-19. That suggests that airlines RO’H : Data has emerged as truly reinforced the connections between multiples more to combat this pandemic. and aircraft manufacturing probably should the world’s most valuable resource. resiliency and sustainability and the Finally, we’ve learned how important be operating with higher levels of capital, Our acquisition of Charles River was importance of long-term thinking. it is to have coordinated global leadership. to name just one example. Investors and underpinned by a belief that if we could When it comes to diversity and inclusion, We had it in terms of keeping financial boards alike should not focus just on capital deploy what we call a “data lake” readily I think there’s a growing admission by markets functioning, but we saw it fall efficiency without asking also about capital available as a normalized and searchable financial services firms that we have a apart in other important areas, particularly resiliency. I believe we will see much more single source of truth, we could serve our problem — and there’s something we around public health. focus on capital resiliency and investors clients better and help them achieve better can do about it. At State Street, it’s been Q : Let’s pivot to pension plans. In our getting back to fundamentals and looking investment outcomes. And if this crisis has a time of incredible introspection for us view, they were already endangered. more at working capital. demonstrated anything to us, it’s that this in the wake of George Floyd’s death and What do you think is on the horizon? Can In terms of how we work, we’ve learned vision and investment thesis were correct. the serious conversations happening pension plans be saved? Should they be? a lot. On the positive side, I think you’ll The best decisions require high-integrity around race and racism. But we have made RO’H : I agree that pension plans see a much more rapid digitization and data available everywhere even from dramatic improvements with women were already endangered, and with the adoption of automation than you would home. Data helps our clients move faster since our Fearless Girl campaign around crisis, they’re even more at risk. This is have seen otherwise. At State Street, we and deliver results at a lower cost, so the gender diversity at the board level forced particularly true with public plans, which had always had a fair number of employees outcomes are going to be better. us to hold ourselves accountable for have been chronically underfunded. Here’s working from home regularly, but it was an Q : As an industry we all want to find female leadership at State Street. We now why: Germany’s Iron Chancellor from the accommodation for their schedules as part the next big thing. Where do you think we need to do the same for Black and Latinx 19th century, Otto von Bismarck, designed of strategic workforce management. I do should look for innovation that will help employees. We intend to use what we’re the first pension plan to start paying off at 65 think working from home will be very much change the world for the better? learning to make the changes needed to at a time when the average life expectancy part of our repertoire. But, it has its limits. RO’H : Artificial intelligence tops the list, improve our own practices. It pains me to was somewhere between 59 and 60 years. For existing employees doing ongoing because I think there’s much more that we think that it took the deaths of so many A pretty good deal for the plan sponsor, work, I think that work-from-home works. can develop. While robotics are already people to get us all to wake up. But the fact right? The problem is we haven’t adjusted But I do worry about how to onboard new integrated into manufacturing, I think post- that we have woken up is a good thing. plans for dramatic increases in longevity people to the company and how to foster Covid, we’ll see robotics become much Now we need to act.

22 Dynamic Partners — 23 �3

24 Dynamic Partners — 25 of venture capital. Opportunity doesn’t DOUG LEONE only reside in the Bay Area, it’s all over — the world. How has this changed the way Sequoia operates? Global Managing Partner DL : We used to invest in technology Sequoia Capital between San Francisco and San Jose. The opportunities were few, and the competition was limited. It was as if we were at a riverbank, with our fishing rods baited with better worms, and we were staying out fishing longer than our competitors. We caught our unfair share of fish. But then technology went from being systems and chips to being ingrained into every market sector: travel, shopping, you name it. All of a sudden, the river became an ocean that was full of more fish. But the number of fishermen also increased. So instead of fishing rods, we had to switch to nets. We had to increase our reach and we devised ways to work with partners and programs which would help us find good things. So we created our own seed fund, and at the same time, we vertically integrated into seed, venture, growth, global growth and publics. We wanted to make sure we could catch the best companies as early as possible, work as closely with the very best founders, and apply our resources to help them build a business. The old “rod-in-the-river” model just did not work anymore. Q : What about founders and company- building over the past 20 years or so? How has that changed? DL : It’s changed a lot. When we invested in technology, such as semiconductors and systems, founders Founded in Menlo Park, California in Q : Let’s start off with the proverbial used to be engineering directors at elephant in the room. You’ve been a partner companies such as Cisco, which means 1972, Sequoia Capital is an iconic venture of UC Investments since 1981, but a few they had lots of previous experience. capital firm that backs company founders years ago, our status as a public university But would that same experienced early and at every stage of growth. Today got in the way of us doing business together. engineering manager come up with DCan you talk about the challenges in our a company where you let a stranger those companies have an aggregate public relationship and how they were overcome? sleep in the spare room in your house DL : We parted ways with a class of (Airbnb)? That is a novel idea, usually market value of more than $4 trillion. investors that had issues related to the from the mind of a 20 something person. Sequoia is also UC Investments’ oldest Freedom of Information Act (FOIA), of But there’s the catch: even though that which UC was one. But over time, things founder may have the flash of genius, her partner; we’ve worked together for nearly changed. First, the regulations evolved a level of business experience is a lot less 40 years. Sequoia’s Global Managing little bit, so you could now assure us that than someone with 15 years of operating company-specific information wouldn’t experience. As a result, we had to invest Partner Doug Leone brought his well- be publicly released. Second, Jagdeep heavily within our partnership into known straight talk to our conversation (Singh Bachher) came on board, and he resources that could help that founder in was aggressive in pursuing a restart of the their company-building efforts. about the evolution of the venture relationship, and he deserves a lot of the Another change is we’re all connected capital world and what to look for next. credit for us becoming partners again. And thanks to products such as the browser he’s now one of my trusted partners, one and the iPhone. You no longer have the of just three or four clients I call for advice luxury of building a business slowly. You prior to launching a new product or when have to run a lot faster and doing so I need help. requires more capital than growing slowly. Q : In your 30+ years at Sequoia, It has never been more expensive to grow you’ve seen a lot of change in the world a business, as you have to run like crazy,

26 Dynamic Partners — 27 given the speed of information transfer e-tailer is a technology flavored company, Q : What are you most excited about now? and the resulting competitive pressures. not a deep technology company. For DL : At this moment in time, the Q : It also sounds a lot riskier for this class of company, one can build a consumer market has slowed down a investors. prototype in a weekend, going from bit. The number of apps on your phone (Jagdeep’s) now one of my DL : Yes, it is riskier, but the upsides nothing to something in record time. A hasn’t changed very much in the last few trusted partners, one have never been bigger, and so it has all small seed investment can fund this effort. years. But the B2B market is vibrant and worked out, so far. There have also been a ton of people who will remain so for a while. One trend is of just three or four clients Q : So why are there suddenly so many have exited companies, made a lot of technology companies bypassing the seed investors? money and are looking for ways to invest chief information officer and going right I call for advice prior to DL : Most of the companies in which $100,000 on day zero. Many former to the business user, helping them to be launching a new product we invest today do not build incredible Google, Facebook and Amazon employees as productive as possible; the “low code, amounts of technology. For example, an are seed investors. no code” trend fits into that. The second or when I need help. trend, which is probably even bigger, is the AI layer on top of a business application DOUG LEONE that makes mere mortals more efficient. Today, it’s not about the overwhelming amounts of data, but it is about adding intelligence that turns that data into actionable information. Q : How is Sequoia prepared for the changes coming in the next 10 years? DL : First of all, it’s important to understand that one of the truisms of technology is that we live in a world of accelerating change. Therefore, the status quo is, by definition, the incorrect way to attack the problem. In fact, the status quo is a sure-fire formula for failure. We’ve that means you have to get to the best Q : Can you say a few words about the on in the university to gain differentiation evolved over the last 48 years by going founders as early as possible. And if that’s lack of diversity in tech? against other limited partners and to find into geographical locations that matter the business you want to be in, you do not DL : It’s clearly nowhere near where investment opportunities in which I in a world that’s more interconnected. need 45 associates, 32 VPs, and so on. All it needs to be. We have made some can co-invest with venture firms. I might While we invest all over the globe, we you need is a handful of people, probably progress as it relates to women, and we even allocate a headcount to this effort now have offices in the US, China, India, fewer than two dozen, to network like are pleased that we have been able to because it is not something you can map Southeast Asia and Europe. And we are crazy for venture investing, and to develop hire a number of exceptional women out once, but it is a dynamic situation vertically integrated. Our $8 billion fund a list with fewer than 50 companies to investors in recent years. Today, we where you constantly have to keep up with gets a lot of press, but the real strategic track for growth investing. And that’s have approximately 25 women investors new developments. parts of the business are the $180 million it. When you are chasing deer do not let throughout our partnership and five Second, I would make sure the current seed fund and the $650 million venture rabbits distract you. in the U.S. leave-of-absence policy for UC is liberal fund, because meeting a founder early Q : Could you give us a take on But there’s no question that we need so that people with these innovative ideas is one of the keys to our success. I’m Sequoia’s culture and the changing face to do better, especially when it comes can take the time they need to get them off not going to disclose what we are doing of leadership? to underrepresented minorities. We’ve the ground. You’ve got to run a university, internally to get prepared for 2030, DL : At Sequoia we love to hire the made the decision that we’re going to I get it. But find the happy medium that but you should assume that we’re not underdogs, the misfits, the immigrants go look for talent in all the places we serves both purposes. standing still. Because we know that we and the outliers. We put these people in haven’t looked before, because it’s the Third, I would have liberal licensing may fail when we try new things, but we a very trusting environment and teach right thing to do, both at the human policies. Differentiate between what you also know if we don’t do anything, we will them how to use the “we” pronoun. Our level and at the professional level. We’re can license to a pharma company for certainly fail. first tenet is performance and our second taking a long-term view and trying to do cash versus what you should license, for Q : One of UC Investments’ 10 pillars is teamwork. We work as a team, always. everything we can to address this issue little ownership, to a new startup which is “Less is more.” Can you talk a bit When there’s a win, it’s our win. When so we can build the inclusive future we is venture funded. These successful about the size of your team as compared there’s a mistake, it’s our mistake. And this all want, while still generating strong professors come back and give major gifts to other firms? includes the people who make us lunch, returns. We are also going to contact a to the university. DL : From the U.S. view, we have to whom you better show the highest few of the historically Black colleges and Fourth, I would make sure to look made the decision that we do not want level of respect. No one is incentivized to universities (HBCUs) and invite them at cross-functional efforts; not just to transact. If someone were to bring in be the lone wolf here. to be our limited partners in the next computer science, but also biology, and a company and say, we can invest $30 One of the things that irritates me about fund cycle. chemistry, materials and data science. million, and we are guaranteed to turn the word culture is that many leaders use Q : The University of California is one The interconnected nature of our world that into $90 million in a couple of years, it as an excuse to not pay their people of the biggest innovators in the world, means that multi-threaded research can we wouldn’t make that investment. Our fairly. You can have all the principles of and we like to invest within the family. lead to wonderful discoveries. returns are driven by the power law, culture you want, but at the end of the day, Where would you advise us to invest in Finally, I do think UC is both in venture and in growth investing. everybody needs to share in the winnings. the UC ecosystem? underappreciated by the industry, and Turning 10 into 50, or 30 into 90 is not They need to be paid a lot during great DL : First of all, you are sitting on a you can increase its competitive advantage how you get there. The way you get there years and then everybody can suffer a little gold mine of engineering and scientific by helping turn research projects into is by backing monster companies, and bit in the lean years. talent. I would want to know what’s going meaningful companies.

28 Dynamic Partners — 29 THE UC INVESTMENTS WAY

31 MADE FOR

What we had was more powerful: a set of principles. The 10 pillars of the UC Investments Way act as our North Star to guide us no When life as we knew it came to a screeching halt this year, matter how turbulent the waters, how dark the night, or how foggy the future might appear. The UC Investments Way is what kept us strong and steady as we met a once-in-a-century challenge. And it is what will keep us moving boldly forward as we embrace the 2we didn’t have a playbook for what to do next. No one did. 0innovation and opportunities that crisis can bring.

THIS MOMENT

32 2 0The UC Investments Way — 33 34 34

1 LESS IS MORE

2 RISK RULES

3 CONCENTRATE

4 CREATIVITY PAYS

5 BUILD KNOWLEDGE

6 TEAM UP

7 WHAT MAKES UC, UC

8 PERFECT ALIGNMENT

The UC Investments Way — 9 HUMAN MEETS MACHINE

10 CENTENNIAL PERFORMANCE 35 35 LESS IS MORE RISK RULES CONCENTRATE CREATIVITY PAYS BUILD KNOWLEDGE TEAM UP

“You have to work hard to get your thinking “In investing, what is “Wide diversification is only required “The person who goes farthest is generally the “An investment “Talent wins games, but clean to make it simple. But it’s worth it in comfortable when investors do not understand what one who is willing to do and dare. The sure- in knowledge pays teamwork and intelligence the end because once you get there, you can is rarely profitable.” they are doing.” thing boat never gets far from shore.” the best interest.” wins championships.” move mountains.” — — — — — STEVE JOBS ROBERT ARNOTT WARREN BUFFETT DALE CARNEGIE BENJAMIN FRANKLIN MICHAEL JORDAN

Fewer assets, higher quality, better With opportunity, there is always risk. Know what you own, well. We construct We believe that building a culture of We are always on the look-out for We’re a collaborative bunch. And we performance. Experience has shown We’ve instilled that truism into our team our portfolios from a concentrated set innovation means opening your mind opportunities that others might not have realize that to be successful, we must us the value of lean, high-performance members, and now we think of ourselves of assets that we understand deeply, as and sometimes charting new paths noticed or simply passed by. That’s why attract the highest- caliber people teams working collaboratively to manage as risk managers, not asset managers. To opposed to many assets that we would be toward performance. We think like it’s critical to build knowledge — through aligned with that culture of honesty, a concentrated, high-conviction portfolio. bridge perspectives among asset classes, hard pressed to describe to our mothers. entrepreneurs, celebrating the wins and connections, collaborations and the humility and respect. We put people first, We’ve greatly reduced the number we speak the same “risk language.” From By limiting the number of investments in learning from the flops. We’re developing occasional deep dive into research — that not lone wolves. We prize diversity of of external managers we use and the our partners, we demand transparency our portfolios, we believe we can reduce a dedicated innovation team within our can give us an edge. We’re fortunate to thought and background and share the number of line items on our books. That into the assets we hold, which allows us risk and increase returns. organization — a rarity in institutional operate within one of the world’s most University of California’s core values. makes it easier to understand what we to assess the risks we’re taking across investment — to incubate, validate and knowledge-rich university systems and That makes it an honor and pleasure to own, especially in a crisis, and gives us all our portfolios. We don’t just measure develop unique pools of capital that we’re delighted to capitalize on that. work in service of the university’s long- fewer decisions to make. The result is a risk, we manage it with a forward-looking leverage our UC competitive advantages. term investment goals. small, agile team laser-focused on areas approach. That’s why we understand that where we can outperform the market. risk is dynamic, human and long-term.

36 The UC Investments Way — 37 WHAT MAKES UC, UC PERFECT ALIGNMENT HUMAN MEETS MACHINE CENTENNIAL PERFORMANCE

“If you don’t have a “Control your expenses better than your “You are cruising along, “We should all be concerned about the competitive advantage, competition. This is where you can always and then technology changes. future because we will have to spend the don’t compete.” find the competitive advantage.” You have to adapt.” rest of our lives there.” — — — — JACK WELCH SAM WALTON MARC ANDREESSEN CHARLES FRANKLIN KETTERING

We are integrated within one of the As long-term investors, we choose our With a small team investing large sums We think of ourselves as an organization world’s premier public research partners with particular care. Without trust of money, we rely on technology to that invests for the next 100 years. We’re “We created the 10 pillars of what we call the UC universities. We manage its money, while and transparency, a long-term relationship gather data that drives our returns and not in this to make a quick buck. Instead, Investments Way to guide our long-term investment its students, faculty, staff and alumni won’t work. Costs matter, of course. If blends our human intelligence with that of we are always mindful of our fiduciary discover and create. This unparalleled external managers won’t provide us with machines. It makes us better, and faster. duty to help ensure the success of the strategy. And over the years, these guideposts have innovation ecosystem is a steady source a detailed accounting of how they make We’re just a short drive from Silicon University of California for generations become something bigger. They’ve endured because of high-quality investment opportunities their money from our money, we pull Valley and fully recognize the benefits, to come. Our centennial orientation we can mine, while its people — including our capital and walk. Perfect alignment and near limitless future, of tech. Now means our decision-making considers they work. They underpin our success. world-class experts in every discipline means win-win — in performance, we’re working with innovative startups the long-term, fundamental challenges and field — offer knowledge and insights collaboration, and goals — and the costs to better understand and manage and risks facing society such as climate that bolster our success. tend to take care of themselves. By our portfolios and gain more access to change, diversity, equity and inclusion, The UC Investments Way embodies our values. It’s demanding complete transparency, which unique markets around the world. and corporate governance. gives us understanding of our risks, we our culture. The 10 pillars keep us grounded when avoid a misalignment of interests and times turn tough. They help us find common ground relationships cut short. when we collaborate among ourselves and with our partners. We codified the UC Investments Way so that every stakeholder of our great institution can easily understand who we are, what we do and why we do it.”

JAGDEEP SINGH BACHHER

38 The UC Investments Way — 39 IS HEALTH IS THE THE WEALTH GREATEST hen Dr. Carrie L. Byington took on her the clinical trial of the drug that helped position as UC Health’s executive vice get the treatment to market. LARGEST ACADEMIC HEALTH wpresident on October 31, 2019, she had no And when Byington needed help SYSTEM IN THE UNITED STATES way of knowing that her first three months getting more Covid-19 tests and on the job would present her with the treatments for the system, it was UC challenge of a lifetime. Investments’ strong relationships with But as an infectious disease expert (she leading suppliers that got her in front of chaired the Infectious Diseases Advisory the people who could make a profound Group for the U.S. Olympic Committee difference in the UC system’s ability to during the Zika virus outbreak), there was meet the challenge. Largest health sciences instructional perhaps no one better to be at the helm “Being able to test was vital for program with nearly 15K students when the Covid-19 pandemic hit the state— protecting our staff and our patients,” in 20 health professional schools on and the University of California. says Byington. “But there was stiff 7 campuses So, when UC Investments CIO Jagdeep competition for tests in the marketplace. Singh Bachher sought out Byington in Jagdeep quickly got us a meeting with early January 2020 to gain insight into Roche, and the very next day they agreed what would become a global pandemic, to supply tests for our entire system. It was a huge win, particularly for our most 5 she was ready. “Though the country hadn’t yet come to grips with what was underserved patient population.” Nationally-ranked academic in store with the virus, I told Jagdeep Once these two important initiatives medical centers (including the threat was real, that it would disrupt were underway, Bachher approached UCLA (#4) and UCSF (#8)*) markets worldwide, and that we needed Byington to vet the more than 300 UC to be prepared to re-envision how we Health research projects related to serve our community during and after the Covid-19. Working together, they were pandemic,” Byington says. able to advance those with the most The collaboration between the two promise, and now Bachher is looking for 12 soon deepened. When the antiviral ways to connect these innovations with Hospitals Remdesivir was shown to be a promising UC Investments’ corporate partners and treatment for Covid-19, Byington asked venture capitalists. Bachher if he could make an introduction “Covid-19 is a new problem and so it to the biopharmaceutical company Gilead requires new solutions that come from Sciences to ensure UC medical centers had innovative thinking,” says Bachher. 9‚000+ access to the drug. “One of our professors, “Because of our relationships — both Faculty physicians Arie Belldegrun, sold his company Kite with our research institutions and our Pharma to Gilead in 2017, so I thought investors — we’re in a great position to he might be able to connect us to senior help move those innovations through the leadership,” says Bachher. “Arie quickly pipeline to market.” made the connection, and Gilead’s chief Adds Byington, “UC is the largest 10‚000+ financial officer called me back right away. academic health system in the country, They were eager to help UC.” and coming in at this unprecedented Nurses Soon after, UC was able to get expanded time was daunting. I’m so gratified to access (called “compassionate use”) to the find partners like Jagdeep, and I really drug, and that connection also led to all feel that working together, the entire UC Dr. Carrie L. Carrie Byington Dr.

five UC medical centers participating in system has risen to meet the moment.” Report 2020-2021 & World Hospitals Best News *U.S.

40 The UC Investments Way — 41 s we often say at UC Investments, our seminars by some 40 Nobel Prize winners. diverse group of 20 young scientists, goalpost isn’t short-term returns. We The organization also selects about 600 scholars, and economists selected from invest for the long term — in financial university students and postdoctoral nine UC campuses. assets, of course, but in people, too. fellows to attend the meetings, not only “This first class of UC fellows A And so we’re always looking for to learn from the Nobel laureates, but embodies the academic rigor and endless new ways to give our stakeholders the to build relationships with international intellectual curiosity that is a hallmark of opportunity to grow, stretch and thrive — to peers. our university,” said UC President Janet build knowledge that will enrich their lives Bachher’s idea came to fruition Napolitano. “I anticipate that this rare and through them, all of us. this year with the creation of a highly opportunity to directly engage with Nobel One such opportunity can be found at an competitive fellowship that would cover laureates and their global peers will spark extraordinary gathering of Nobel laureates travel and attendance costs for UC’s best ideas and forge lasting connections. The from around the world that takes place and brightest. The selection process is fellows benefit, and so does UC.” every summer in Lindau, Germany. Not rigorous: students must submit an essay, “I am so pleased that the president’s long ago, UC’s Chief Investment Officer letters of recommendation, an evaluation office has allocated funds to make this Jagdeep Singh Bachher had the opportunity of their research accomplishments, a possibility for many diverse young to attend as a guest. and approval by the Lindau meetings scholars throughout the UC system,” said “It was a life changing experience, organization in Germany. A work group of selection committee member Randy something I’ll never forget,” Bachher said. UC administrators and faculty winnows Schekman, the UC Berkeley professor A “And though several UC students have down the list of candidates, which is then awarded the Nobel Prize in physiology or attended Lindau over the years, I realized approved by the UC president and the CIO. medicine in 2013. our office could do something to give more In March 2020, UC Investments The fellows were set to travel to Lindau. of our students the opportunity.” announced the inaugural class of the Then a global pandemic intervened. The Lindau Nobel Laureate Meetings UC President’s Lindau Nobel Laureate While the in-person event was offer invitation-only lectures and small Meetings Fellows, an accomplished and canceled — no impromptu get-togethers,

no spectacular landscapes of deep THE 2020 UC PRESIDENT’S LINDAU NOBEL LAUREATE MEETINGS FELLOWS blue waters and Alpine mountains, no German beer — much of the content CAUSE was moved online. The first week David Boyer (UCLA) Akshay Paropkari (Merced) concentrated on the fields of medicine, Kevin J. Bruemmer (Berkeley) Andrew J.E. Rowberg physics, chemistry and physiology, Priya Crosby, Ph.D. (Santa Barbara) with an emphasis on interdisciplinary (Santa Cruz) Nicole S. Michenfelder-Schauser research. A second week of the program (Santa Barbara) centered on economic sciences. Tomas Gonzalez Fernandez, Ph.D. As for the inaugural class of UC (Davis) Bryan Scott (Riverside) fellows, they are all invited back — in Samantha Marie Grist, Ph.D. Lauren M. Sheehan, Ph.D. (Irvine) person — for the summer of 2021. (Berkeley) Leslie Allyn Simms (Davis) And UC Investments will continue Yuki Kobayashi, Ph.D. (Berkeley) to sponsor fellows every year. Sarah M. Tashjian, Ph.D. (UCLA) Dequina A. Nicholas, Ph.D. “There is no better investment than Xinting Yu, Ph.D. (Santa Cruz) SIXTY-EIGHT UC FACULTY AND STAFF HAVE BEEN AWARDED 69 NOBEL PRIZES — SO FAR in the promise of young minds intent (San Diego) Neil Bennett (Irvine) on making our world better,” said Michelle M. Nuño (Irvine) That includes the 2020 Nobel Prize in Physics shared by UCLA’s Andrea Ghez, a professor of physics and astronomy, Bachher. “Our office hopes to sponsor Will Gorman (Berkeley) and Reinhard Genzel, a UC Berkeley professor emeritus of physics and astronomy, for discovering “a supermassive Jonas Oppenheimer this fellowship for many years to come compact object at the center of our galaxy.” Winning the 2020 Nobel Prize in Chemistry was UC Berkeley biochemist of Toronto University Rare Thomas Fisher source: Book Library, Image (Santa Cruz) Diana Van Patten Rivera (UCLA) and to continue to be inspired by the Jennifer Doudna, who co-developed CRISPR-Cas9, a genome editing breakthrough that has been called the discovery accomplishments and caliber of UC of the century for its powerful implications. students and postdoc researchers Coordinators for the fellowship program are UC Investments’ chief of staff, More than 25 UC alumni have won Nobel Prizes as well, including UC Davis alumnus Charles Rice, who won the 2020 who may one day win a Nobel Prize Dianne Klein, and Robert Louis Powell, III, distinguished professor of chemical Nobel Prize in Physiology or Medicine for the discovery of the hepatitis C virus. themselves.” engineering, food science and technology at UC Davis.

42 The UC Investments Way — 43 “We strive to be the most data-forward pension and endowment on the planet.” ARTHUR R. GUIMARAES, UC INVESTMENTS CHIEF OPERATING OFFICER

to meet the challenges of day-to-day operations once Covid-19 hit. Because we had built a culture of agility and innovation, our team members didn’t miss a beat when they started working from home in mid-March. And because we had invested in the technology, our systems were completely decentralized, meaning we transitioned seamlessly from moving money from our office in downtown Oakland, California to moving money from a team member’s kitchen table in the Bay Area suburbs. With the systems we have in place, we run daily reports that give us the A TRANSFORMATIONAL data-driven insights we need to make the right moves at the right time. APPROACH TO 21ST This was a direct result of our CENTURY INVESTING CIO’s prescient belief that antiquated operations and compliance practices were Large institutional investors aren’t not only a liability, but a drag on future known for their ability to pivot, their investment success. Immediately after his innovative data platforms, or their arrival in 2014, Guimarães embarked on a investment and operational risk tools massive effort to move the office from the and practices. And six years ago, costly, ill-fitting legacy technologies he UC Investments was sorely in need inherited to a more holistic, modern and of all three. There was no investment agile platform. He found a willing partner operations and data team to speak in Solovis, then an innovative fintech of. Instead the team was focused on start-up (recently acquired by Nasdaq), accounting, and compliance practices and he led the effort to implement a data were weak. That forced our investment platform that made data inconsistencies, teams to do much of the work irregularities, undocumented themselves. We were hardly alone. assumptions and just flat-out-wrong data Most institutional investors have humans who use it, and that’s why it things of the past. At the same time, the struggled to innovate and embrace was so important to transition our new technology streamlined processes new technology, relying instead on investment operations team with and provided a holistic portfolio view traditional accounting skills and people who could take advantage of the uniting investments, operations and risk evaluating investment decisions innovations the technology provided. teams. The whole process took just a little after the fact based on performance. With the right data systems in place, we more than a year — a pace unheard of in But when you’re managing $130 can quickly gather insights critical to the institutional investing world — and at billion in a fast-moving market, you our internal clients, the 10 UC campus one-tenth the cost of other modern tools need every competitive edge. And foundations who have sent us $5 billion in the marketplace. In fact, the expected Chief Investment Officer Jagdeep Singh to manage on their behalf, as well 10-year cost savings is $20 million. Bachher knew he had to shake things as better integrate our environmental, Compared with many legacy system up. So he brought in Arthur R. social and governance (ESG) criteria implementations across the globe, cost Guimarães as chief operating officer to into our investment process. Our small savings over 10 years would be closer to transform a team and find a modern team is as driven by analyzing data as $100 million. technology stack that would meet it is by crunching numbers. Today, our True innovation and a break from the ever-changing demands of UC team has experts in: the status quo are paramount to being Investments’ multi-asset class portfolio. — Data Management & Analytics successful investors. We’re proud This past year, as we and the rest — Investment Transaction Support that over the past few years, we’ve of the world have been buffeted by a — Operational Risk Management transformed our investment operations deadly pandemic, recession and civil — Investment Administration team into a nimble, forward-thinking unrest, these early investments in — Client Relations group of experts and adopted a holistic people and state-of-the-art technology It was the powerful combo of “Human approach to technology, one that will have more than proved their value. Meets Machine”— one of our 10 reap a tremendous return on investment Technology is only as effective as the investment pillars — that allowed us for the University of California.

The UC Investments Way — 45 t UC Investments, simplicity sustains products made themselves abundantly on its own. This human decision-making us. It underpins our 10 investment clear. Today, most organizations still is born of experience, talent, conviction pillars, guideposts that are easy to don’t invest in understanding what they and, yes, gut. Investment decisions, understand and impossible to forget. own, nor the underlying risks, instead especially in the midst of crisis, take time In a complex global investment relying on a custodian bank to maintain and deliberation, and the resulting actions landscape, we pare down options, a list and measure performance. But that require agility and focus. Reducing the demand transparency and stick to what information is rarely available in real time, number of our positions has confirmed to we know well. essential during a crisis such as the one us that “Less is More,” another of our 10 “Risk Rules” sums up how we assess — we’re in. pillars that informs our risk philosophy. and reassess — every investment When Chief Investment Officer Jagdeep At UC Investments, this has been the risk opportunity. It is core to our governance Singh Bachher arrived at the University story to date during the crisis of 2020. and culture of compliance. This risk of California in 2014, the situation at UC mindset has served us well as we have Investments was much the same. There WHAT’S NEXT? — As the inventor managed the University of California’s was no internal risk team. There was no Charles Kettering said, “We should all assets during a deadly and devastating centralized database of the many — too be concerned about the future because pandemic, a market drop unseen since the many — assets, companies and financial we will have to spend the rest of our lives Great Depression, a bazooka of federal instruments we owned. And we did not ask there.” We need a mindset and technology stimulus, and a baffling disconnect our partners for transparency. that accommodates this unerring truth. between Wall Street and Main Street. Our There was much work to do. And because the markets discount now for approach to managing risk is forward- Many of our partners were events in the future, some of the long-term looking, dynamic and human. uncomfortable providing the transparency issues will manifest as risks in the shorter- While the past may be prologue, when we sought; those are the partners we no term. For example, the most severe it comes to managing risk, it should never longer work with. And by eliminating outcomes from climate change might not be prescriptive. Today’s market is not the partners who were doubling, or tripling, be realized for decades, but prices will market of the past. Leverage and liquidity the risks we had been inadvertently taking, quickly readjust once the market wakes up are different. There are new strategies our portfolio became more concentrated, to these long-term effects. and an emphasis on new instruments. avoiding over-diversification. With far The short time frame of standard risk Regulation and fiscal and central bank fewer partners and key investments in models comes from one characteristic — policy can shift. In the past two decades, technology, we can now effectively manage one could say flaw — that has persisted we’ve lived through three major financial our risk. We know what we own and where since they were introduced nearly 30 crises: the dot-com bust of 1999, the we are. We measure our risk in real time, years ago: they measure risk only through Global Financial Crisis of 2008 and now critical to navigating a financial crisis that, a rearview mirror. Typically, they look at the novel coronavirus pandemic of 2020. as yet, has no end in sight. the variability of returns over the past one We’ve learned many lessons, of course, or two years to assess risk going forward. but we don’t follow playbooks of the past. COMMON CULTURE, COMMON LANGUAGE — Risk in the next few days or months might It has often been said of this latest crisis At UC Investments, we are all risk managers. generally be similar to the risk over the that organizations have been forced to This is a mindset, part of a culture where past year although, unfortunately, not “build the plane as they are flying it,” but all our investment professionals are fluent when it really matters. at UC Investments we are hardly flying in the same risk language and share the But however well the standard risk blind. We have had six years to prepare. same approach to risk. We think in terms models work for the short term, they are of risk factors, for example, not only asset not appropriate for the long-term mission TRANSPARENCY — Know what you own. classes. We are aware of the state of the of UC Investments as an asset owner. In There’s hardly an investment adage portfolio risk, and active in discussions of contrast to the monthly or even daily simpler than that. Yet one of the most risk in those terms. The hallmark of a strong focus of banks and hedge funds, the salient lessons of the Global Financial risk culture is thoughtful discussion across time horizon of a pension is measured Crisis was that too many investors did not all investment areas, particularly when the in lifetimes. UC Investments is focused know what they owned — that is, until markets seem to be going off the rails. And, on Centennial Performance, our tenth the risks hidden in opaque investment finally, all of this must lead to action. If investment pillar. The University of the process simply stops with risk reports California has been around for 152 years, “Our approach generated and recited in weekly investment and we must look toward risks over an to monitoring risk is meetings, it is a risk ritual, not a risk culture. equally long horizon. That is a difficult forward-looking, task, but certainly as a start we have to JUDGMENT — Collect and study the data, think beyond the next few months. The dynamic and human.” consult and seek advice, weigh the risks, world will change and the markets as we RICHARD BOOKSTABER, and then decide. This is the management see them today — and how they might UC INVESTMENTS part — the human part — of risk evolve in the future — are not what they CHIEF RISK OFFICER management that no algorithm can handle were in the past. MANAGEMENT

46 The UC Investments Way — 47 CLIMATE CHANGE GEOPOLITICAL TENSIONS THE BULL MARKET PRIVATE CREDIT Seemingly lost with the current focus Although the U.S.- We were in the Investors have sought on the pandemic is the existential China trade war was longest market out fresh corners of the threat from climate change. Its effects the most visible, there expansion in history. private asset space, the will come to the fore over the next were broad tensions With the expansion dominant one being decades, but for market risk the in the geopolitical has come increasing private credit. We COVID-19 implications are more immediate. sphere. We monitored vulnerability, created a new private The market vulnerability characterized by As investors increasingly realize the our China exposure — rising leverage and credit asset class for risk illiquidity and the concentration of positions inevitability of the longer term effects, positions directly concentration and management purposes, became readily apparent in March. Fixed they will reprice assets today. We in China and other increasing illiquidity, pulling this exposure income markets seized up, nearing the point have added climate change analysis positions and risk in particular in the into a single sleeve of failure, only to rebound with unprecedented to our risk systems, and, consistent factors that could be fixed income markets. and placing limits action by the Federal Reserve. Risk remains with our environmental, social and collateral damage. This vulnerability on it. This bore fruit asymmetric, the risk of a large drop greater governance (ESG) objectives, we We were mindful of led our decision to during March and than of a similar rise. Only the path of the have moved away from exposures in our non-U.S. positions increase cash April, when private pandemic, the future course of the Fed and the path of climate change risk, most generally, holding an holdings over the credit experienced stimulus, and the prospects for a vaccine, will notably those related to fossil fuels. overweight in the U.S. course of the year. disproportionate losses. determine when this asymmetry is mitigated.

RISK CHALLENGES OF THE PAST YEAR

48 The UC Investments Way — 49 Navigating geopolitical economics in the time of Covid-19 — by NEIL BROWN A BRAVE NEW WORLD

here was a time before the Venezuelans to oust Maduro, and The pandemic exposed pandemic. For most of the year, roughing up “free-loading” allies. He geopolitics permeated the headlines claimed tactical successes and implied weakness in the and the pricing of risk. Leaders there was a strategy behind them. T struggled with populism and great Impeachment ended what was left resilience of nations power competition. The pandemic of bipartisan cooperation on Capitol exacerbated these and wider trends, Hill and proved the high-water mark of and the global order exposed weakness in the resilience Republican party loyalty in the Senate. of nations and the global order, and The president’s unorthodoxy continued and accelerated the accelerated the end of globalization as to test the allegiance of his party’s we know it. National and international senior echelons, and then a virus from end of globalization responses to the health and economic distant Wuhan Province created a crises highlighted weak leadership at health crisis and questioned his ability as we know it ... Across the top and prompted alarm over an to provide national or global leadership. inability to deal with the much bigger The ensuing economic crisis removed the world a stark climate emergency ahead. But not even his electoral ace card in the eyes of all a pandemic could stop a crassly timed oil but his most fervent supporters, and the choice emerged as price war or the new Cold War between killing of George Floyd in Minneapolis Washington and Beijing the world’s two largest economies. revived racial tensions and concerns about the president’s willingness, never each asked: “Are you AN EXTRAORDINARY YEAR — In mid- mind ability, to unite. By mid-year, 2019 President Trump was in his pomp, Joe Biden had been catapulted from with us or against us?” dominating his party and brushing off deep in the field of Democratic lessons from the 2018 midterms. He candidates to a poll lead over Trump reaped the benefits of delivering on in the presidential race. campaign promises to his adoring core, Overseas, opponents and bemused and a still-firing economy won him the allies had begun to distinguish benefit of the doubt with enough of between Trump’s rhetoric and delivery what was left of the political center. He and see predictability in policies wielded sanctions and tariffs, and in his devised primarily to appeal to his core. unique way, conflated trade and foreign With U.S. global leadership and the policy while targeting trade deficits and 20th-century global order undermined, pursuing the interests of traditional an emboldened China aggressively manufacturing jobs even at consumers’ pursued Communist Party influence at expense. He was abandoning (or home and abroad, North Korea tested rebranding) NAFTA, and edging toward nuclear bombs and moved inexorably a “great” trade deal with China. And he toward intercontinental ballistic missile was making bold foreign policy moves: capability, Maduro endured thanks abandoning the Iranian nuclear deal to Russia and Cuba and even Iran, Gulf and applying “maximum pressure” on states reached for non-U.S. allies, India Iran, withdrawing from “endless wars,” legislated aggressively over Kashmir, supporting Netanyahu’s strident Israel, Iran continued to fuel unrest from meeting Kim Jong-un, encouraging Yemen to Syria, Russia continued to

50 The UC Investments Way — 51 mask domestic weakness and triggered leverage their sovereign wealth funds PANDEMIC — The human impact of the (with Saudi Arabia) an unsuccessful oil and courted transactional relationships pandemic will not be known for some price war targeting American shale, and with China and Russia. Southeast time, especially in fragile states that have the European Union moved toward the Asian nations were pushed into minimal health and social care, but it strategic autonomy from the U.S. that the U.S. orbit on issues of maritime was quickly recognized as the greatest France had always sought without the sovereignty as China ignored the 2016 peacetime disruptor of global economic credible defense capability to make it international court ruling and asserted activity in a century, and that some of the real. But the U.S. did show leadership on sovereignty within the “nine-dash economic and societal change would be one issue: China. line” that encompasses 80 percent of permanent. The pandemic accelerated China continued to act with impunity a sea as large as the Mediterranean national, regional and global debates in Xinjiang and Hong Kong, and toward and the zones of neighboring states. In already underway on rising income Taiwan, India, and regional neighbors many places, notably Africa and Latin inequality, supply chain risks, the return of in the South China Sea. But these America, states realized the price of great power politics, and the ascendency actions and its crude, ham-handed indebtedness to Beijing. But in Europe, of China. Governments, especially those attempts to impose a narrative that a new “Geopolitical E.U.” determined without experience of viruses such as China’s pandemic response had been to trust the power of trade to reset its SARS and MERS, struggled with the flawless only served to elevate into the China relations and influence “suspect” speed of the crisis, hampered by a lack mainstream suspicions in the West behavior. Across the world a stark of clarity over events in Wuhan and each of “China’s rise.” China’s increasingly choice emerged as Washington and other’s national responses. The pitfalls urgent activities spoke to domestic Beijing each asked: “Are you with us or of the globalization that had emerged pressures over its handling of the against us?” after the Cold War became abundantly pandemic, and its impact on slowing The long awaited two-year Council clear. Governments learned they were growth that was already threatening Xi on the Future of Europe was another responsible for stockpiles and supply Jinping’s ambitious economic targets victim of the pandemic, but the chains, and that they had been complacent ahead of the Chinese Communist prospect of meaningful E.U. and over what the market could deliver (e.g. Party’s 2021 Centenary. These weighed Eurozone reform was increased by medicine, personal protective equipment on the delayed National People’s the pandemic’s health and economic and intensive care units) to ensure Congress, which strictly controlled impacts. The usual bars to meaningful resilience as a pillar of national security. pandemic-related debate, and rubber- change appeared negotiable in the Early in the pandemic, as governments stamped very modest economic targets face of an existential threat to the wrestled with health and economic and a draconian national security union. And as in the U.S., the prospect crises and struggled to avoid adding law that rode roughshod over treaty of green investment increased as political crises, there was a realization obligations and Hong Kong autonomy. political leaders struggled to keep that nothing would be the same. But they Taiwan, where Chinese pressure up with enthusiasm for sustainable were unsure exactly what that meant. unintentionally led to electoral success investment led by consumers and And while medical experts warned that for President Tsai, was on notice; embraced by investors and industries. this pandemic would not be the last, an China’s offer of special status, just like Brexit was done on January 31, and increasing number of leaders highlighted Hong Kong, no longer looked attractive. the United Kingdom and the E.U. set that the health, economic and political With the U.S.-China decoupling, about finding a landing zone for their impact of climate change would, by an the Cold War concept of spheres of future relationship that gets smaller order of magnitude, be much greater still. influence re-emerged. Gulf states (and Brexit gets “harder”) as the struggling with the toxic mix of “reform December 31 end of the U.K. transition Neil Brown is global strategist at CQS (UK) fatigue” and low oil prices looked to period nears. LLP, a UC Investments partner based in London.

52 The UC Investments Way — 53 �4

54 The UC Investments Way — 55 ARTHUR GUIMARAES — Chief Operating Officer UC Investments DOING During a year of unprecedented challenges, UC Investments WELL reached major milestones in our environmental, social and governance (ESG) approach to by how we invest. We spoke with UC Investments’ Chief Operating Officer Arthur Guimarães, who oversees ESG integration, about our work over the past six years DOING to become one of the nation’s most innovative institutions in sustainable investing. GOOD

UC INVESTMENTS’ BOLD APPROACH TO SUSTAINABLE INVESTING

56 The UC Investments Way — 57 : Let’s start with the big picture. MSCI to create a brand new index that What’s been the overall approach will exclude all companies in the MSCI to integrating ESG risk factors into ACWI IMI (our benchmark) that have UC Investments’ decision-making, proven or probable fossil fuel reserves, operations and internal processes? whether that’s a billion barrels of oil, gas AG : We’ve really focused on two core or thermal coal or just one. We believe issues: climate change and diversity, having a public, transparent approach is equity and inclusion. Let’s start with best, and now anyone can see what we climate, which we’ve been working hard don’t invest in. We’re proud to be the on since I got here in 2014. We’ve taken first major university to have taken this a risk-appropriate and returns-focused comprehensive approach. approach to eliminating fossil fuels from Q : So is your work on climate change our portfolio, a milestone we reached in done? What advice would you give other this year. After thoughtful analysis, we asset owners who are thinking of doing determined that the risks associated with the same? fossil fuel assets made them poor long- AG : No, I don’t think we’re ever “done.” term investments. We’re always gathering information, In regard to diversity, equity and data, looking into new areas. However, in inclusion, it’s no secret the financial world our business, it’s the returns that matter. in general isn’t known for its leadership Our Real Assets portfolio, which since Q : Let’s look more deeply at what a company shareholder. We refined our intentional process has already resulted indicators along the way, but this is not in this area. That’s a problem for many inception had been dependent on oil you’re doing in the areas of diversity, recruiting and outreach process to ensure in UC Investments investing more than a destination, it is a journey. We hope reasons, and for us as investors, chief and gas, is the best example. Until a few equity and inclusion. that whenever we have an open position $10 billion with firms owned by women our efforts not only improve our risk- among them is the fact that diverse teams years ago, the returns for that portfolio AG : The business case for diversity on our team, we cast a wide net for talent. and diverse investment partners. adjusted returns, but help advance get better results. But we’ve been ramping were basically zero. But after strategic is clear and compelling: academic and We were the first endowment to Q : What about the “G” of ESG: diversity and inclusion in the US asset up our efforts in this area over the past few sales and no new acquisitions of fossil corporate research establishes that publicly report our diversity statistics governance? management industry as well. Success years, which has positioned us to move fuels, the portfolio has compounded at diverse and inclusive teams perform and we’ve worked to expand and AG : Over the past year, we took a fresh won’t be summed up by a single metric; better than homogeneous teams. And UC deepen our relationships with groups look at our approach to proxy voting we aren’t chasing arbitrary numbers or Investments is fully committed to diversity, such as the Diverse Asset Manager and shareholder engagement and made filling quotas. We have been transparent equity and inclusion, recognizing the Initiative and the National Association several improvements to better integrate about our efforts in diversity and inherent benefits of both. The Knight of Investment Companies. To better governance factors into our process. will continue to track and report our Foundation study by Harvard is one of the integrate our commitment to diversity, First, we updated our proxy voting progress. Our success here involves most comprehensive studies with several equity and inclusion in our investment guidelines to reflect our concern that people, culture and human relationships, concrete conclusions. Diverse-owned process, we updated key documents in executive compensation is inadequately and as such, no single static milestone firms represented just 1.3 percent of assets our investment process, including our linked to long-term performance and can mark victory. Our efforts and results in 2017, yet diverse teams performed due diligence questionnaire and our shareholder value. We also updated will evolve. at least as well, and often better, than contracts with investment partners. We the guidelines to advance cognitive But as we did with the “E” part of forward with power and speed, especially more than 7 percent for the past three more homogenous firms. So if we’re all also engaged with our top 15 investments diversity on boards of directors. And ESG, we’ve begun an intentional process in light of the recent events in our country years. We believe that institutional practicing what we preach — investing partners — who manage some 60 percent we determined that by collaborating that will lead us to answers on diversity, that have spotlighted the urgent need investors are well positioned to invest for performance — there’s a significant of our assets — around their diversity, with like-minded institutional investors equity and inclusion. Our bottom line to focus on these important issues. And in transformational solutions to disconnect. We want to do our part to equity and inclusion policies, programs, we could have a greater impact on the will ultimately telegraph the measure of as with climate, our decisions in diversity, environmental and social issues while change the system. and metrics. We surveyed our U.S.-based companies we invest in. To amplify our success. equity and inclusion are driven by our earning a competitive return. Our We believe that the cognitive diversity investment partners to develop baseline our voice without adding staff, we We plan to invest at least another fiduciary duty to aim for the best risk- investments in clean energy illustrate that comes with diverse backgrounds data about our investments in funds run retained the responsible engagement $2 billion with diverse investment adjusted returns. how we put our ideas into action. In and experiences is a competitive by women, people of color, veterans, overlay (reo®) service offered by BMO firms over the next four years. We will Q : So let’s dig into the details a bit. This the past year, our investments in clean advantage, and we won’t let implicit disabled persons and members of the Global Asset Management. Working also work with the chancellors of our year, UC Investments announced it had energy solutions topped $1 billion. I’d or institutional bias hamstring our LGBTQ community. Among other things, with reo®, UC Investments can be part 10 campuses to create a pipeline of sold its fossil fuel assets. What does that also emphasize, too, that we’re investing investment performance. So in FY19-20, we learned that diversity among our of constructive dialogues with many of underrepresented talent, because we mean, exactly, and why did you do it? for the next 100 years. If you look at the we designed an innovative strategy — investment partners is far greater than the companies in which we invest about believe today’s students will become AG : Well, the bottom line is we sold science of climate change, oil and gas are called “Diversified Returns” — that helps the aggregate national numbers for the material environmental, social and tomorrow’s finance leaders and off $1 billion of fossil fuel assets. Here’s just not sustainable. So we’re getting in increase our access to and inclusion of asset management industry. But we governance risks. entrepreneurs and we want to support why: As a long-term investor, we don’t early on alternatives, with the idea that we diverse talent when we invest, when we also realized we may be missing out on Q : So how will you know you’ve and nurture them. And because we believe these assets will generate great will be holding these assets for a long time. hire and when we exercise our rights as investment opportunities unless achieved success in meeting your manage the money of the largest public risk-adjusted returns. So today our we increase our access to top performing diversity and inclusion goals? research university in the nation, we are pension, endowment and working capital firms owned by women, Black people AG : Our success around diversity will also able to connect promising students pools are fossil free, and we’ve beaten and Latinos. So we’ve changed our be measured the same way we measure from different backgrounds with our our own five-year goal of investing $1 manager selection process to ensure our success overall: good investment most significant investment partners, billion in climate change solutions. And we always consider a diverse slate of returns. We have tools and programs firms that manage trillions of dollars in not only did we sell, we also worked with qualified potential managers. This more to help us get there and we will track assets. We commit to that.

58 The UC Investments Way — 59 RET I RE

BET TER

UCRSP BY THE NUMBERS: n addition to the traditional pension, retirement benefit. Since then, more — Increased passive implementation to out of equities at the wrong time. So them to retire well. Here’s the good UC Investments manages the than 15,000 new employees have done 75 percent from 38 percent in 2014. UC assembled a “strike team” of UC news: our retirees are living longer. university’s defined contribution so, which has meaningfully increased — Reduced operational complexity for Investments, UC Human Resources, and The not-so-good news is that for some, plan, the UC Retirement Savings the importance of our best-in-class UC Investments. our outside partners: State Street Global that means their savings might not last I Program. UCRSP was created more investment lineup. — Reduced management fees by 65 Advisors and Fidelity Investments. as long as they do. That’s why we are $27B than 50 years ago as a supplemental Here’s how we’ve evolved and percent (14 bps to 4 bps), saving $65 Working together, we monitored our working on a plan to offer a “Lifetime In assets under management plan to allow participants to voluntarily improved our retirement operations over million in fees for participants over participants’ behavior, doing daily check- Income” option to our retirement save above and beyond their mandatory the past few years: six years that will save participants ins on both their selling activity and their program by the end of the 2021 fiscal pension contribution. Today, its more — Recruited a strong team at UC an estimated additional $150 million engagement with our investment advisors. year. This option is what’s called a than 300,000 members have amassed Investments to manage the over the next 10 years. Then we created a comprehensive qualified longevity annuity contract — or some $27 billion in savings, making it one Retirement Savings Program. — Significantly increased direct education campaign that included written QLAC — designed to help make income 300‚000+ of the largest public defined contribution — Concentrated our fund line: We had communication of UC Investments materials as well as a live webinar with last throughout retirement. We will be plans in the United States, second only 242 funds in 2014; we have just 13 with participants. CIO Jagdeep Singh Bachher that reached rolling out an educational campaign Members to the federal government’s plan for its funds today. — Significantly deepened collaboration thousands of participants. Through explaining all the particulars, including a own employees. — Made the Target Date Fund series the and engagement with internal and our collective effort, we flattened our below-market price that takes advantage The supplemental nature of UCRSP default investment choice (replacing external stakeholders. participants’ selling curve and successfully of UC Investments’ institutional changed in 2016 with the introduction of the Savings Fund), leading to a four- delivered the message of staying the purchasing power. 10.7% the Savings Choice defined contribution fold increase in assets from $2.5 While being laser focused on our strategic course in times of market volatility. This evolution is one more example plan. Instead of automatically being billion in 2014 to $10.5 billion today. plan, we have stayed agile to address of how we’re continuously innovating Amount of paycheck members enrolled in the traditional pension plan, — Evolved the Pathway Funds asset unexpected challenges. When Covid-19 hit WHAT’S NEXT? — With more employees our retirement savings program, helping voluntarily save on top of new hires were given the option of making allocation, improving overall in early 2020, we immediately addressed opting for Savings Choice, we are keenly participants have a seamless shift to their mandatory contribution the Savings Choice plan their primary performance. the significant risk of participants selling focused on providing a path to allow retirement readiness — and beyond. of between 7%–8%

60 The UC Investments Way — 61 STRATEGIC CREATIVITY

63 Taken together, our 10 pillars are the bedrock upon which our organization is built. This year, we leaned into one in particular — Creativity Pays — as we made real-time decisions during one of the greatest crises of our lifetime. When faced with adversity, we relied on our deep well of creativity — through our partnerships, by using technology, when making decisions — to lead us forward. Though our crystal ball was fogged, the tenacious resiliency of our people and culture remained clear. We’re Californians, after all. We’re known for having the creativity and spirit to tackle the biggest problems on Earth. This year, we were in our element.

Challenge Grows What Happened in the Markets This Year

Public Equity Markets Fixed Income Markets

We entered the fiscal year on July 1, It’s no surprise that in an unprecedented those rates. It formally dropped its 2019, celebrating the longest economic Where Will Equities Go? S&P 500 year on all fronts, we saw much activity longstanding practice of pre-emptively MSCI ACWI IMI expansion on record: a decade of low in global rates. In a risk-off environment raising rates to head off inflation above rates, abundant global liquidity and steady (lower equities), investors usually flee to its 2 percent target. It explicitly stated growth. While many investors fretted 1600% safer assets, or what’s called a “flight to that “maximum employment is a broad- about late-cycle aggressive behavior and quality.” The Federal Reserve lowered based and inclusive goal,” a signal that feared the good times were nearing an shorter-maturity benchmark rates from it hoped for a modest inflation rise. end, market behavior did not change. The 2.5 percent to zero to encourage people In a low interest rate environment, it trade war between the United States and 1200% and companies to borrow money cheaply becomes difficult to generate attractive China dragged on, and commentators and keep the economy operating. This returns in fixed income, making passive debated whether interest rates should be move affected long-maturity rates like portfolio management to a lower risk increased (assuming the economy was the 10-year benchmark US Treasury, benchmark the best strategy for UC. 800% healthy enough) or decreased (to support which dropped to 0.60 percent, and It’s also important to preserve capital consumption, borrowing and the financial the 30-year, which came down to 1 by not taking undue interest rate markets). In late February 2020, U.S. percent. Lower interest rates — and the risk, so the role of fixed income for equity markets surged to all-time highs. 400% corresponding higher prices — were the the upcoming year will be to preserve But just as the U.S.-China trade war biggest driver of investment returns and capital and provide liquidity to fund seemed near resolution, news hit of a resulted in consumers using (almost) opportunities in other asset classes that fast-spreading coronavirus in Wuhan, “free money” to buy automobiles offer a higher return potential to overall China. Health experts predicted that 0% 1996 2000 2004 2008 2012 2016 2020 or jump into home ownership with UC investments. absent effective measures to contain mortgage rates at a 60-year low. what became known as Covid-19, the we had already sold our fossil fuel assets. leverage of over six times their ratio To keep the economy afloat, the Fed Funds Rate world would soon be faced with a deadly But the real story of this fiscal year of debt-to-earnings before interest, Fed also bought $3 trillion worth Lower Rates For Longer 10 Yr Treasury pandemic unlike any experienced in was, of course, March’s calamitous taxes, depreciation and amortization. of securities and increased its balance 2 Yr Treasury our lifetimes. market meltdown due to Covid-19. The Fundraising statistics were also off the sheet from $4 trillion to $7 trillion They were right. When the world went collapse was unparalleled in its speed charts, with private equity assets under (and eventually headed to close to 10% on lockdown, equity markets crashed. (fastest widening in credit spreads, fastest management at a record $4.1 trillion, and $10 trillion, more than twice what it Combined with a collapse in oil prices bear market achieved in equities) and nearly half of limited partners reporting was during the global financial crisis stemming from a breakdown in OPEC unprecedented in its reach. No asset being under their private equity allocation of 2008.) 8% talks, uncertainty about what “normal” class was spared, and correlations spiked. target, meaning increased amounts of Keeping pace with the Fed, would look like in the future drove Liquidity became dear and anything that capital were chasing the asset class. the Treasury fired its own bazooka, unprecedented market volatility. could be sold was sold; illiquidity was With the pandemic still raging spending $3 trillion to help small The Federal Reserve and the Treasury exacerbated by aggressive bank behavior worldwide at the time of this writing in businesses and individuals who had 6% used every available tool to prop up the such as marking down securities and late August 2020, the S&P 500, the Dow lost jobs due to the pandemic. It economy and markets: from helicopter triggering margin calls. The confluence and global equities have already surpassed aggressively raised money to fund this money to bailouts to security purchases in of these circumstances created massive their February peaks. Once again, by selling Treasury securities, from 4% the open market. Instead of raising rates, forced selling and liquidations from investors are speculating that something T-bills all the way to 30-year bonds, and the Fed cut them five times, including leveraged players, including mortgage real has got to give: the markets are not even re-introduced the 20-year bond twice in the first half of March. estate investment trusts, mutual funds and reflecting the reality of the tremendous for the first time in several decades. 2% UC’s overweights to China and levered exchange traded funds. economic and human costs the pandemic In yet another sign that low interest healthcare stocks, as well as our Purchase price multiples in private has wrought. Asymmetric market risk rates will be with us for the foreseeable underweight to energy stocks, helped us companies reached an all-time high, and remains. What’s ahead? No one knows, future, in late August 2020 the Fed beat the public equity benchmark. By May more than 75 percent of new deals had of course. Caution is the watchword. approved a major shift in how it sets 0% 1996 2000 2004 2008 2012 2016 2020

66 Strategic Creativity — 67 OVERVIEW UC Investments UC Investments As of June 30, 2020 $2.4 Billion of Value Added Over 6 Years “Costs Matter” — $1 Billion Saved in Fees Over 6 Years

$2.4B $1B

$620M $1.2B

$602M $260M $411M $171M $100M $3M $40M Working Retirement Pension Endowment UC Fiat Lux Retirement Total Return Endowment Pension UC Capital Savings Investments Saving Investments

UC Investments — Key Partnerships UC Investments — Office ofCIO Costs “Less is More” Size. Scale. Service

280 0.3%

50 82% FeweR 90% LESS 0.028%

2014 2020 Industry UC Investments o68 Strategic Creativity — 69 ENDOWMENT Highlights Performance Critical financial support for the programs Gross Return Assets and initiatives that 1 Yr (%) 1 Yr (%) 3 Yr (%) 5 Yr make our system the 6.5% $14.0B (%) 10 Yr (%) 15 Yr (%) 20 Yr (%) 25 Yr (%) 29 Yr Net Return in Billions ($) in Billions best in the world. 5.0% Value Market Endowment 14.0 5.0 7.4 6.5 8.8 7.1 5.9 8.5 8.9 FY Q4 Q3 Q2 Q1 Policy Benchmark 3.0 5.7 5.5 7.2 6.2 5.3 7.7 8.4 Beginning Market Value $13.4B $13.0B $14.2B $13.3B $13.4B Value Added 2.0 1.7 1.0 1.6 0.9 0.6 0.8 0.5

Market Gains $0B $1.2B ($2.0B) $0.8B $0B Public Equity 6.0 6.0 7.3 6.4 9.9 6.9 4.5 7.8 –

Value Added $0.5B ($0.2B) $0.6B ($0B) $0B Fixed Income 0.6 5.9 4.7 3.7 4.3 4.8 5.9 6.6 –

Net Cash Flow $0.1B ($0B) $0.1B $0.2B ($0.2B) Private Markets Private Equity 2.4 21.9 24.0 21.4 19.4 14.9 10.5 20.4 – Ending Market Value $14.0B $14.0B $13.0B $14.2B $13.3B Absolute Return 3.1 (1.4) 4.0 2.3 5.1 5.0 – – – Real Estate 1.0 (0) 5.5 7.2 11.3 5.1 – – – Real Assets 0.7 9.3 7.0 2.3 2.7 – – – –

Cash 0.3 1.9 2.0 1.7 1.8 2.6 3.0 3.7 –

Value-Add Asset Allocation Net Returns Benchmark

10%

8.8% 8.9% Portfolio Weight (%) Weight Weight (%) Weight 8.5% (%) Weight 0.5 1, 2020 July in Billions ($) in Billions Value Market 1.6 0.8 30, 2020 June Policy Long-Term 8% 7.4% Policy Long-Term 7.1% 1.7 6.5% 0.9 5.9% 1.0 Public Equity 6.0 42.8 30.0 40.0 6% 0.6 5.0% Fixed Income 0.6 4.0 10.0 8.0 2.0 7.7 8.4 Private Markets 4% 7.2 Private Equity 2.4 16.9 22.5 24.0 5.7 6.2 5.5 5.3 Absolute Return 3.1 22.2 25.0 10.0 Private Credit – – – 4.0 Real Estate 1.0 7.0 8.5 8.0 2% 3.0 Real Assets 0.7 5.0 4.0 4.0

Cash 0.3 2.1 0 2.0

0% 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr 20 Yr 25 Yr 29 Yr Total $14.0B 100% 100% 100%

E70 Strategic Creativity — 71 72 72 July 1, 2020July 1, Policy Benchmarks June 30, 2020 Policy Benchmarks Absolute Return Absolute Return

Cash Cash Fixed Income Fixed Income Real Assets Real Estate Real Assets Real Estate Public Equity Private Equity Public Equity Private Equity Private Credit Private Credit Actual Portfolio Return Actual Portfolio Return Actual Portfolio Return Actual Portfolio Return Actual Portfolio Return

(Tobacco Free) (lagged 3-months) Credit 1-5Year Index US Treasury Bill Index IMI (Tobacco andFossil Fuel Free) MSCI All Country World Country MSCI All Index IMI MSCI All Country World Country MSCI All Index Net Barclays US Aggregate Bond Index Bloomberg Barclays US Government/ Bank of3-Month America HFRI Fund of Funds Composite Russell 3000 Index +2.5% HFRI Fund of Funds Composite Russell 3000Index +2.0% NCREIF ODCEIndex NCREIF ODCEIndex

25 22.5 4 8.5 4 8 10 24 – 10 30 2 4 8 40 –

Target Target

(%) (%) 15 10 0 4 5 10 0 20 – – – – 1 0 5 30

Minimum Minimum (%) (%) 15 30 8 12 5 6 – – – – 32 32.5 17.5 52.5 15 50

Maximum Maximum

(%) (%) Cash Flows December 31,2019 Volatility June 30,2020 Volatility Risk Allocation $0 $1 $2 $3 $4 95% Economic Growth 1995–2004 (10 Yrs)

1.3 26.6% 8.5% 4% Residual 2005–2014 (10 Yrs) 2.2 September 30,2019 Volatility March 31,2020 Volatility 1% Credit Inflows Payout 0.3% Others 2.1 2015–2020 (5 Yrs) Strategic Creativity — Value inBillions($) 3.8 23.6% 0.2% Commodity 9.0% 73 73 PENSION Highlights Performance A plan that invests across a broad range Gross Return Assets 1 Yr (%) 1 Yr (%) 3 Yr (%) 5 Yr of asset types to 2.3% $70.2B (%) 10 Yr (%) 15 Yr (%) 20 Yr (%) 25 Yr (%) 28 Yr in Billions ($) in Billions provide retirement Value Market income security for all Net Return of our members. 1.7% Pension 70.2 1.7 5.1 5.4 8.2 6.0 5.2 7.8 8.3 Policy Benchmark 3.1 5.8 5.7 7.8 5.7 5.0 7.4 8.0 FY Q4 Q3 Q2 Q1 Value Added (1.4) (0.7) (0.3) 0.4 0.3 0.2 0.4 0.3

Beginning Market Value $70.0B $64.6B $73.6B $69.7B $70.0B Public Equity 39.8 3.3 6.4 6.6 10.0 6.4 4.3 7.6 8.2

Market Gains $0B $6.3B ($10.8B) $4.2B $0.3B Fixed Income 14.3 5.2 4.4 4.2 4.5 4.9 6.0 6.8 7.2 Core 10.3 6.8 4.7 4.2 4.1 4.5 5.7 6.6 7.0 Value Added ($0.2B) ($1.4B) $1.6B ($0.3B) ($0.1B) High-Yield 2.0 (0.3) 3.1 4.5 6.7 – – – – Emerging Market Debt 2.0 0.5 3.6 4.7 4.8 – – – – Net Cash Flow $0.4B $0.7B $0.2B $0B ($0.5B) TIPS – – – – – – – – –

Ending Market Value $70.2B $70.2B $64.6B $73.6B $69.7B Private Markets Private Equity 4.6 9.4 14.0 12.4 13.4 11.3 7.3 17.8 18.1 Absolute Return 4.5 (2.4) 3.6 2.0 5.0 – – – – Real Estate 4.2 (1.6) 4.5 6.5 10.9 4.0 – – – Real Assets 2.2 5.5 6.2 2.1 2.9 – – – –

Cash 0.6 1.9 2.0 1.7 1.8 2.6 3.0 3.7 4.0

Value-Add Net Returns Benchmark Asset Allocation

10%

8.3% Portfolio Weight (%) Weight Weight (%) Weight 8.2% (%) Weight 7.8% 1, 2020 July in Billions ($) in Billions Value Market 0.4 0.3 30, 2020 June 8% 0.4 Policy Long-Term Policy Long-Term

6.0% 5.1% 5.4% Public Equity 39.8 56.8 50.0 53.0 0.3 6% 5.2% 0.2 Fixed Income 14.3 20.4 20.0 17.0 8.0 Core 10.3 14.7 13.0 13.0 7.8 4% 1.7% 7.4 High-Yield 2.0 2.9 2.5 2.5 Emerging Market Debt 2.0 2.8 2.5 1.5 5.8 5.7 5.7 5.0 TIPS 0 0 2.0 0

2% 3.1 Private Markets Private Equity 4.6 6.5 10.0 12.0 (0.3) Absolute Return 4.5 6.4 10.0 3.5 0% (0.7) (1.4) Private Credit – – – 3.5 Real Estate 4.2 5.9 7.0 7.0 Real Assets 2.2 3.1 3.0 4.0

(2%) 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr 20 Yr 25 Yr 28 Yr Cash 0.6 0.8 0 0

Total $70.2B 100% 100% 100%

P74 Strategic Creativity — 75 Policy Benchmarks (%) (%) (%) Risk Allocation

June 30, 2020 Target Minimum Maximum

Public Equity MSCI All Country World Index IMI 50 40 60 (Tobacco Free) Volatility Volatility June 30, 2020 March 31, 2020 Fixed Income Barclays US Aggregate Bond Index 13 10 16 24.7% 22.6%

High-Yield Merrill Lynch High Yield 2.5 0 5 Volatility Volatility Cash Pay Index December 31, 2019 September 30, 2019 Emerging Market JP Morgan Emerging Bond Markets 2.5 0 5 8.1% 8.2% Debt Global Diversified

TIPS Barclays U.S. TIPS 2 0 4

Private Equity Russell 3000 Index + 2.0% 10 5 15 Economic Growth Residual Credit FX Others 95% 3% 1% 0.3% 0.3% Absolute Return HFRI Fund of Funds Composite 10 0 20

Private Credit 0 0 0

Real Estate NCREIF ODCE Index 7 2 12 (lagged 3-months)

Real Assets Actual Portfolio Return 3 0 6

Cash Actual Portfolio Return 0 0 10

Policy Benchmarks (%) (%) (%)

July 1, 2020 Target Minimum Maximum

Global Equity MSCI All Country World Index Net IMI 53 43 63 (Tobacco and Fossil Fuel Free)

Core Fixed Income Bloomberg Barclays US 13 10 16 Government/Credit 1-5 Year Index

High-Yield Merrill Lynch High Yield Cash Pay 2.5 0 5 Index Fossil Free

Emerging Market JP Morgan Emerging Markets Bond 1.5 0 3 Debt -Global Diversified Fossil Free

TIPS Removed from Policy 0

Private Equity Russell 3000 Index + 2.5% 12 7 17

Absolute Return HFRI Fund of Funds Composite 3.5 0 5.5

Private Credit Actual Portfolio Return 3.5 0 7

Real Estate NCREIF ODCE Index 7 2 12

Real Assets Actual Portfolio Return 4 0 8

Cash Bank of America 3-Month 0 0 5 US Treasury Bill Index

76 Strategic Creativity — 77 TOTAL RETURN Highlights Performance INVESTMENT POOL A working capital Gross Return Assets portfolio with an

2.0% $7.4B (%) 1 Yr (%) 3 Yr (%) 5 Yr asset and risk (%) 10 Yr (%) 15 Yr (%) 20 Yr (%) 25 Yr (%) 12 Yr Net Return in Billions ($) in Billions allocation geared to Value Market an intermediate-term 1.7% horizon. Total Return Investment Pool 7.4 1.7 4.2 4.1 6.3 – – – 6.3 FY Q4 Q3 Q2 Q1 Policy Benchmark 5.6 5.3 4.7 6.4 – – – 6.3 Beginning Market Value $9.2B $7.7B $8.9B $9.0B $9.2B Value Added (3.9) (1.1) (0.6) (0.1) – – – 0

Market Gains $0.3B $0.5B ($0.7B) $0.3B $0.1B Growth 4.8 (11.3) 1.7 3.4 8.5 – – – 5.7 Public Growth 4.6 (2.1) 4.9 5.1 9.4 – – – 5.7 Value Added ($0.1B) ($0.1B) ($0B) ($0B) ($0B) Private Growth 0.1 (0.7) 16.2 – – – – – 0

Net Cash Flow ($1.9B) ($0.8B) ($0.5B) ($0.4B) ($0.3B) Income 2.5 6.4 4.9 4.4 5.0 – – – 5.8 Public Income 2.3 6.9 4.9 4.4 5.0 – – – 5.8 Ending Market Value $7.4B $7.4B $7.7B $8.9B $9.0B Private Income 0.1 (1.5) 3.7 3.4 – – – – –

Cash 0.1 1.9 2.0 1.7 1.8 – – – –

ValueAdd Net Returns Benchmark Asset Allocation

8%

6.3% 6.3% 1.7%

6% 4.2% Portfolio Weight (%) Weight Weight (%) Weight 4.1% (%) Weight 6.3 1, 2020 July in Billions ($) in Billions Value Market June 30, 2020 June Policy Long-Term 4% Policy Long-Term 6.4 5.6 5.3 4.7 2% Growth 4.8 64.6 35.0 0 Public Growth 4.6 63.1 0 50.0 0.1 1.5 0 0 (0.1) 0 Private Growth

0% (0.6) (1.1) Income 2.5 33.7 50.0 0 Public Income 2.3 31.9 0 50.0 Private Income 0.1 1.9 0 0 (2%) (3.9) Private Markets Absolute Return 0 0 15.0 0

(4%) 1 Yr 3 Yr 5 Yr 10 Yr 12 Yr Cash 0.1 1.6 0 0

Total $7.4B 100% 100% 100%

78T Strategic Creativity — 79 Policy Benchmarks Risk Allocation June 30, 2020

(%) (%) (%) Volatility Volatility

Target June 30, 2020 March 31, 2020 Minimum Maximum 18.8% 14.1% Growth MSCI All Country World 35 30 40 Volatility Volatility Index IMI (Tobacco Free) December 31, 2019 4.4% September 30, 2019 4.6% Income Barclays US Aggregate 50 45 55 Bond Index

Absolute HFRX Absolute Return 15 5 25 Return Index Economic Growth Residual Credit FX Others 96% 4% 0.1% 0.1% 0.1%

Policy Benchmarks July 1, 2020 (%) (%) (%) Target Minimum Maximum

Public MSCI All Country World Index 50 35 55 Equity Net IMI (Tobacco and Fossil Fuel Free)

Fixed Bloomberg Barclays 50 35 55 Income US 1-5 Year Government/Credit Index

Private Total TRIP Portfolio Benchmark 0 0 10 Assets

80 Strategic Creativity — 81 SHORT TERM Highlights Policy Benchmarks INVESTMENT POOL June 30, 2020 A working capital Gross Return Assets

portfolio managed (%) Target to ensure adequate 1.9% $10.5B Net Return Short Term Weighted Average of the Income Return on a 100 liquidity to meet our Constant Maturity 2-Year U.S. Treasury Note system’s cash needs. 1.9% and the Return on 30-Day U.S Treasury Bills

FY Q4 Q3 Q2 Q1

Beginning Market Value $5.6B $7.1B $5.5B $6.0B $5.6B

Market Gains $0.1B $0B $0B $0B $0B Policy Benchmarks

Value Added $0B $0B $0B $0B $0B July 1, 2020

Net Cash Flow $4.9B $3.4B $1.6B ($0.5B) $0.4B Target (%) Target Ending Market Value $10.5B $10.5B $7.1B $5.5B $6.0B

Short Term 50/50 Weighted Average of the Yield on a 100 Constant Maturity 1-Year U.S. Treasury Note and the 30-Day U.S. Treasury Bills

Value-Add Net Returns Benchmark

5%

4.0% 4% 3.7% 1.0 1.0 3.0% 3% 2.6% 1.1 1.0 1.9% 2.0% 1.8% 2% 0.6 0.2 1.7% 1.0 0.4 3.0 2.7

1.8 1.9 1% 1.6 1.3 1.3 0.8

0% 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr 20 Yr 25 Yr 28 Yr s82 Strategic Creativity — 83 BLUE & GOLD Highlights Asset Allocation An investment vehicle that helps our campuses Gross Return Assets increase their revenues while reducing reliance – $0B Net Return on state funds. Portfolio Weight (%) Weight Weight (%) Weight Market Value Market in Millions ($) – 30, 2020 June Long-Term Policy Policy Long-Term FY Q4 Q3 Q2 Q1 Growth 0 0 70 Beginning Market Value $1.3B $1.7B $2.0B $1.7B $1.3B Income 0 0 30 Market Gains ($0B) $0.1B ($0.3B) $0.1B $0B Cash 0 100 0 Value Added ($0.1B) ($0.1B) $0B $0B $0B Total 0 100% 100% Net Cash Flow ($1.1B) ($1.7B) ($0B) $0.2B $0.4B

Ending Market Value $0B $0B $1.7B $2.0B $1.7B

Performance Policy Benchmarks June 30, 2020 (%) (%) (%) 1 Yr (%) 1 Yr Target Minimum Market Value Market in Millions ($) Maximum

Blue and Gold 0 – Growth MSCI All Country World 70 60 80 Policy Benchmark – Index IMI (Tobacco Free) Value Added – Income Barclays US Aggregate 30 20 40 Growth 0 – Bond Index

Income 0 – Total 100%

Cash 0 –

B84 Strategic Creativity — 85 ValueAdd FIAT LUX INSURANCE Highlights Net Returns Benchmark The largest university 0.3% captive insurance Gross Return Assets 5% program in the country. 0.3% $1.2B 2.5% Net Return 3% 4.9 0.3% 4.1

FY Q4 Q3 Q2 Q1 1% Beginning Market Value $1.1B $1.1B $1.2B $1.1B $1.1B

Market Gains $0.1B $0.1B ($0B) $0B $0B (1.6) (1%) Value Added ($0.1B) ($0B) ($0B) $0B ($0B) (4.6) Net Cash Flow $0.1B $0B $0B $0.1B $0B (3%) Ending Market Value $1.2B $1.2B $1.1B $1.2B $1.1B

(5%) 1 Yr 3 Yr

Performance Asset Allocation Portfolio Portfolio Weight (%) Weight Weight (%) Weight in Billions ($) in Billions Value Market June 30, 2020 June 1 Yr (%) 1 Yr (%) 3 Yr Policy Long-Term Growth 0 0 14.0 in Billions ($) in Billions Value Market Income 0 0 65.0 Fiat Lux Insurance 1.2 0.3 2.5 Policy Benchmark 4.9 4.1 Alternatives 0 0 7.5 Value Added (4.6) (1.6) Cash 1.2 100 13.5 Growth 0 – – Total $1.2B 100% 100% Income 0 – –

Alternatives 0 – – Policy Benchmarks (%) (%) (%)

Cash 1.2 1.4 1.6 Target Minimum Maximum

Growth MSCI All Country World 14.0 0 30.0 Index IMI (Net)

Income Barclays Intermediate 65.0 55.0 100.0 Aggregate

Alternatives HFRI Fund of Funds 7.5 0 20.0 Composite

Cash 90 Day T-Bill 13.5 0 15.0 FL86 Strategic Creativity — 87 MEETING THE (NEXT) MOMENT

For UC Investments, 2020’s cascade of shocks to humanity and the global economy has surfaced some simple, yet profound, truths. We will not return to the “normal” we knew. Time doesn’t go backward — and nor will the world. From an investment perspective, among the most important lessons we’ve gleaned from the ongoing crisis is that those that adapt, survive. But those that innovate, thrive. A crisis such as the present one is an incubator for innovation, and at the core of innovation is technology. So we ask ourselves, “What companies are innovating for tomorrow? Which are using technology to hone their competitive edge?” These are the companies that have staked their future on the truth that change is the constant of our innovative time. In such companies we seek to invest. Technology is an agent of change. It evolves and scales, and it will move the world forward to something different — and better, we hope. And so tech is the investment lens that will guide us forward to the new year and beyond, always connecting dots, looking for disruptors and gauging risks to the status quo. With fiduciary responsibility for the world’s leading public research university, we cannot afford to be left behind. No matter what happens next, we’re prepared.

88 Strategic Creativity — 89 Appointed Regents Ex Officio Regents Office of the President Regents-Designate Chancellors Investments Committee Maria Anguiano Eleni Kounalakis Mark Cianca Eric Mart Gene D. Block Richard C. Blum Lieutenant Governor of Interim Vice President and Chief Treasurer, Alumni Associations of the Los Angeles Membership Laphonza Butler California Information Officer University of California Cynthia Larive Maria Anguiano Michael Cohen Janet Napolitano Jagdeep Singh Bachher Jamaal Muwwakkil Santa Cruz Richard Blum Gareth Elliott President of the University of Chief Investment Officer Student Regent Designate Carol Christ Michael Cohen Cecilia Estolano California & Vice President, Investments Debby Stegura Berkeley Gareth Elliott Howard “Peter” Guber Gavin Newsom Alexander Bustamante Secretary, Alumni Associations of the Howard Gillman Richard Lieb George Kieffer Governor of California Senior Vice President, Chief Compliance University of California Irvine Hadi Makarechian Sherry L. Lansing Anthony Rendon & Audit Officer Sam Hawgood Lark Park Richard Leib Speaker of the Assembly Michael Brown Officers of the Regents San Francisco Richard Sherman Hadi Makarechian Christine Simmons Provost & Executive Vice President, Jagdeep Singh Bachher Pradeep K. Khosla Chair Eloy Ortiz Oakley Vice President, Alumni Academic Affairs Chief Investment Officer and Treasurer San Diego Christine Simmons Lark Park Associations of the University Pamela Brown Alexander Bustamante Juan Sánchez Muñoz William Um John A. Pérez of California Vice President, Institutional Research Senior Vice President, Chief Compliance Merced Vice-chair Janet Reilly Tony Thurmond & Academic Planning & Audit Officer Gary S. May Charlene R. Zettel Richard Sherman State Superintendent of Public Carrie Byington Charles F. Robinson Davis Jonathan “Jay” Sures Instruction Executive Vice President, UC Health General Counsel & Vice President, Henry T. Y. Yang Ex Officio Members Hayley Weddle William Um Arthur Ellis Legal Affairs Santa Barbara Gavin Newsom Charlene R. Zettel President, Alumni Vice President, Research & Graduate Studies Anne Shaw Kim Wilcox John Pérez Associations of the University Yvette Gullatt Secretary and Chief of Staff to the Riverside Janet Napolitano of California Vice President & Vice Provost, Graduate, Regents Undergraduate and Equity Affairs Advisors Advisory Members Claire Holmes Faculty Representatives (Non-voting) Kate Klimow Kum-Kum Bhavnani Senior Vice President, External Relations Kum-Kum Bhavnani Staff Advisor Kate Klimow & Communications Chair, Academic Senate Ann Jeffrey Drew Zager Glenda Humiston Mary Gauvain Staff Advisor designate Vice President of Agriculture Vice Chair, Academic Senate Chancellors & Natural Resources Sam Hawgood Nathan Brostrom Pradeep K. Khosla Chief Financial Officer Kim Wilcox Craig S. Leasure Vice President, Laboratory Management Cheryl Lloyd Acting Vice President, Human Resources Janet Napolitano President of the University of California Rachael Nava Executive Vice President, Chief Operating Officer Charles F. Robinson General Counsel & Vice President, Legal Affairs

90UC ReGenTs & OffiCeRsStrategic Creativity — 91 UC invesTmenTs

92 Team Strategic Creativity — 93 Broke the Financial Markets The Day Coronavirus Nearly THE WALL STREET JOURNAL May, 2020 threatened the viability of America’s companies and municipalities The March 16 stock crash was part of a broader liquidity crisis that Foreign Students Sour on America, Jeopardizing a $39 Oct. 2019 Billion Industry. ‘It’s ridiculous’: People Investments Jeffrey Youngman Investment Administration'What will you tell your children?': They provide critical revenue Gas prices spike Around Investment Officer, Public Equity Greta Thunberg blasts climate to U.S. universities. But the Jagdeep Singh Bachher Sharon Zhang Diori Johnson inaction at Davos. Greta Thunberg administration’s immigration above $4 in the World Chief Investment Officer Investment Director, Manager, Investmenttold Administration a World Economic Forum panel on crackdown has them going 201Lowe’s to lay off thousands9 of workers— as it outsources2020 their duties ¶ The home-improvement NewsSatish Ananthaswamy Global Credit Elizabeth Agbayaniclimate that activists were demanding an elsewhere. ¶ Last May, Luis Carlos Soldevilla graduated with one SF & California Are Panic- chain, based in Mooresville, N.C., declined to say exactly how many employees were affected. But the Wall Senior Managing Director, Jack Zhu Client Officer, Privateend Investmentto all investment in fossil fuel of the best grade point averages in his Mexico City high school. exploration and extraction, calling for a For his senior project, he even tackled Goldbach’s conjecture, a Street Journal reported that thousands of employees were told this week that their jobs were eliminated, Global Rates Senior Investment Analyst, William Byrd Buying … drastic reduction of emissions to zero. famous number theory problem. Soldevilla considered attending which the company confirmed. ¶ Lowe’s spokeswoman Jackie Pardini Hartzell said Thursday that the cuts Susie Ardeshir Public Equity Client Officer, Facilities Support are coming as the company moves to third-party assemblers and facility services to allow store associates to She dismissed some of the measures Boston University and the University of Washington, both of Toilet Investment Director Milkah Cunningham spend more time on the sales floor serving customers. Previously, some store workers did assembly work, mooted by governments and companies, which had accepted him. He also had fond memories of the CORONAVIRUS Investment Risk Management Paper? such as constructing floor models, and janitorial work. Hartzell said that employees in these positions will John Beil Client Officer, Leadsuch Public as andplanting billions of trees to University of California, Berkeley, where during the summer of FALLOUT THREATENS have the opportunity to apply for other open roles at Lowe’s. ¶ She said the company is not disclosing how Managing Director, Private Investmentscapture carbon dioxide from the 2016 he took a computer science course.But instead of enrolling AUTO INDUSTRY’S March 2020 many are affected as the number of employees affected varies by store and the company has a strong track Private Equity Richard M Bookstaber Lin Lee atmosphere. Her comments came after at a U.S. school, Soldevilla started this fall at the University of SUPPLY CHAIN Donald Trump announced the US Toronto, Mississauga, where he’s pursuing a double major in record of retaining associates in other roles within the company. (The Washington Post, August 2019) Lucy Chang Chief Risk Officer Emeritus Client Officer, Public Assets PUBLISHED FEB   Investment Officer, Allen Kuo Rosario Mendoza joined the global one trillion tree computer science and mathematics. Why did he pick the Canadi- initiative. (The Guardian, Jan 2020) an school over those big American names? (Bloomberg, Jan ’19) Private Equity Deputy Chief Risk Officer Client Officer, Reception and STOCKS JUST HAD THEIR BEST WEEK IN Edmond Fong and Managing Director Public Investments China Deals ‘Body Blow’ to Struggling DECADES. NOW COMES THE DROP. Senior Managing Director, William Dumas Marvis Walker Telling investors to sell now, in Investment Risk Officer Client Officer, Executive Support U.S. Farm Belt — The U.S. Farm Belt

2019 Absolute Return the midst of the coronavirus Jessica Hans Brad Lyons Yanni Zhao right reasonsos. J a take on more debt — for the it’s acceptable for the U.S. to Economists increasingly say braced for deeper pain from the crisis, feels a bit like yelling Investment Officer, Real Estate Investment Risk Officer Analyst, Financial Services escalating trade battle between the fire in a crowded room—even if Cay Hayne there are no crowded rooms anymore. after talks world’s two biggest economies after Managing Director, Real Estate Investment Operations and Services Still, it feels like the right China said it would suspend all thing to do. ¶ We’re not being Craig Huie imports of U.S. agricultural goods. Investment Director, Arthur R. Guimarães bearish for bearishness’ sake. in China’s move will a„ect farmers fact, we’re optimists by nature. Absolute Return Chief Operating Officer The market goes up over time, after Dianne Klein Wendy Pulling raising fuzzy green soybean pods in all, and history teaches that it Chief of Staff Director, ESG Integration Illinois, milking cows in California pays handsomely—especially in a Albert Lee Larry Adkinson nuary 2020 and feeding hogs in North Carolina, retirement account—to keep the . 2, 2019 Investment Director, Real Assets Senior Counsel, all of whom have seen business su„er faith. But one of the things about Office of General Counsel Tony Lo as a result of tari„s that Chinese the Covid-19 crisis is the speed at Berkshire Hathaway’s Investment Director, Global Rates Jim Castro which things happen. It has been Jia Luo Director, ožcials implemented last year. GM workers strike on pay and benefits break down breathtaking...(Barrons, April ‘20) Cash Pile Hits a Record Sept Investment Officer, Public Equity Investment Transaction Services (The Wall Street Journal, Aug 2019) Marco Merz Sean Chiles A ug 2019 – Trump says it doesn't matter if the US ha a recession because the trade war is more importan Managing Director, Operations Analyst, SOMEBODY FINALLY TOLD WALL STREET THE WORLD IS ON FIRE. While the rest of OCTOBER, 2019 Defined Contribution Products Public Investments us have been feeling every bump, pothole and rumble strip on this godfor- Margaux O’Brien CorporateJohn Dea saken road called 2020, Wall Street had, for weeks, seemed to float above Investment Director, AmericaOperations Manager, it all, blissfully unaware. That ended today. (CNN Business, June 2020) Trade War Pause Leaves Few Happy Public Equity Public Investments Byron Ong Says BlackFloyd Gazaway Jr. The Great Coronavirus Crash of 2020 Is Di erent (Bloomberg, Mar ) Investment Officer, Lives MatteOperationsr. Analyst, The Great Coronavirus Crash has been frightening in its speed Global Credit It NeedsPrivate Investments and breadth. Stocks have lurched lower worldwide, with brief Christine Onyung Brady Jewett rallies between the falls, like wounded bulls in a corrida. Senior Investment Analyst, to HoldOperations Up Analyst, Through 1 p.m. on March 18 the S&P 500 index was o„ 27% for Absolute Return a Mirror.Private Investments GE Moves to Cut Kristopher Ostrander Navdeep Kaur Roughly 13,000 the year to date, Germany’s DAX was down 38%, and Japan’s — 中 Senior Investment Analyst, Manager, Investment Compliance Aviation Workers Nikkei was o„ 29%. In the credit market, investors have ’ed Private Equity —˜™š 2020and Operational Risk Management — John Ritter Mark MacDonald 因新冠疫情 ， 中国东 May 2020 junk bonds. Even U.S. Treasury bonds—traditionally a safe harbor in crisis times—have come under pressure, possibly Managing Director, Real Assets Operations Analyst, David Schroeder Public Investments because investors are selling them to cover losses elsewhere. Investment Director, Miguel Mendoza First major Chinese airliner suspends flights to the United States over coronavirus outbreak (Feb 2020) Operations Analyst, Global Rates UK will plunge into recession if it 航暂停往返美国航班 FED CHAIR POWELL SPEAKS AND OIL PRICES SURGE, Aaron Staines leaves Europe without Privatea Brexit Investments 美 million people abruptly lost their jobs, wiping out LEAVES INVESTORS EXPECTING American Airlines extends STOCKS FALL Investment Director, deal. (CNN Business, 2019)Chi Tu Chevron Will Write Down Assets a decade of employment gains in a single month. A RATE CUT Boeing 737 Max flight AFTER U.S. KILLS Global Rates The UK Office of BudgetInvestment Respon- Performance Manager, by at Least $10 Billion. Chevron 73 U.S. UNEMPLOYMENT The speed and magnitude of the loss defies IRANIAN GENERAL Steven Sterman sibility (OBR) warned DataThursday Management and Analytics says it will book a charge of at least cancellations through early comparison. It is roughly double what the nation Senior Managing Director,that "heightened uncertaintyTalin Wauchopeand University of California September. The airline, which PUBLISHED JAN   $10 billion because lower long-term RATE SOARS TO 14.7%, experienced during the entire financial crisis Global Credit declining confidence" wouldSenior deter Data Analyst, 1111 Franklin St., ninth floor investment while higher trade prices for oil and natural gas are from 2007 to 2009. ¶ As the virus’s rapid spread is the largest U.S. carrier, said Mike Swett Data Management and Analytics barriers would slam exports. Oakland, CA 94607making some projects less valuable. THE WORST SINCE accelerated in March, President Trump and a the cancellations would affect Trevor Woods Investment Director, "These push the economy into [email protected](U.S. News, December 2019) number of state and local leaders put forth 贸 approximately 115 flights per day. Global Credit Operations Manager, www.UCOP.edu recession, with asset prices and THE DEPRESSION ERA restrictions that led businesses to suddenly shut American previously announced Ronnie Swinkels the pound falling sharply,"Private said Investments 20.5 million people lost their jobs in April, the down and shed millions of workers. Many £

Managing Director, Publicthe Equitygovernment's budget watchdog.Albert Yong ¤ in April that it would cancel flights Designed by Mucho. Printed by Primary Color. ¥ Labor Department said Friday. Many analysts businesses and households also canceled all ¦ UK stock markets would fall 5%, Why the Global §

Director, Data Management , 2020 on the 737 Max through Aug. 19 due Matt Webster This book is printed on recycled paper made from believe it could take years to recover. ¶ The U.S. travel plans. Analysts warn it could take years to Investment Officer, Privatewhile Equitythe pound would andplummet Analytics sustainable, well-managed forests.Coronavirus unemployment rate jumped to 14.7 percent in return to the 3.5 percent unemployment rate the to the Federal Aviation Administra- 10%. GDP would shrink by 2% by April, the highest level since the Great Depression, nation recorded in February, in part because it is the end of 2020. tion’s mandatory grounding of the Recession Could as many businesses shut down or severely curtailed unclear what the post-pandemic economy will 94 The report is a stark warning Boeing jet. (Fox Business, Sept. 2019) operations to try to limit the spread of the deadly look like, even if scientists make progress on a s t 易 ahead of October 31, the latest Last a Long Time 7 deadline for Britain to depart. coronavirus. ¶ The Labor Department said 20.5 vaccine. (The Washington Post, May 2020) 战