[August 28, 2001]

In mid-June, a few of us from UC HR/Benefits had the opportunity to talk with Dave H. Russ, the new UC Treasurer and Vice President for Investments appointed by the Regents in April. Dave's first day on the job was June 1. We came up with a few questions and concerns that we thought might be foremost in participants' minds and parted with a wealth of information from a man whose knowledge and ideas left us totally invigorated.

Background
Dave brings his investment expertise to UC directly from the University of Texas Investment Management Company (UTIMCO), the country's second largest endowment fund. There he served as Managing Director of Public Markets, overseeing $15 billion in assets for the University of Texas System, Texas AandM University, and several other university endowments. At UT, Dave was instrumental in helping the endowment and operating fund assets grow from $9 billion to over $15 billion from 1997 to 2001. Before that, he was Director of Investment Management and a portfolio manager for the Pacific Telesis Group in San Francisco, managing ERISA-controlled pension funds. For six years, he was part of the Stanford endowment management team, where he was responsible for internally managed funds and debt issuance. He was a member of the investment committee known as the portfolio management group, and held the title of Senior Portfolio Manager of the Stanford Management Company.

Investment Philosophy
In his work, Dave brings to life his fundamental credo: Take the investment skills that you have developed to exercise sound judgment and a coherent investment strategy. He has been exercising this skill for nearly 15 years by adding value to the institutional portfolios that he has managed for other universities and pension plans. He regularly uses proven quantitative methodologies, investment trading models, and software systems to explain portfolio performance and behavior to boards, to understand and control multidimensional risk, and to create custom benchmarks to measure performance more accurately.

Dave's advice to his investment managers: "The measurement of past risk and the expectation of future risk is essential to portfolio construction and monitoring. The inherent risk embedded in any investment portfolio can be a positive contributor to performance. Risk isn't bad if you understand and control it. The risk/return tradeoff is a fundamental concept in asset allocation. For example, combining assets that appear "risky" on a stand-alone basis with other asset classes may in fact reduce risk to the overall portfolio, due to the interaction of the correlation and covariance effects. Our goal is to maximize return while minimizing risk in all the investment portfolios."

Here are some other thoughts that came up during our discussion—Dave thinks UC's revised asset allocation policy is a good, disciplined strategy. "Our asset allocation framework is under constant review, and indexing a portion of UC's investment portfolios is a prudent decision. One of our goals is to protect the investment portfolios from downside surprises. We are exploring strategies to allow the portfolios to grow on the upside, while preserving the substantial gains achieved in the 1990s."

Recognizing that market downturns are fresh in everyone's mind these days, we wanted Dave to address what the Treasurer's Office does to protect and preserve the assets of the UC plans. Investment diversification is key. A well-diversified multi-asset class portfolio can mitigate losses in one portion of the portfolio by realizing gains in another area. He pointed out that unexpected market downturns are intrinsic in our global economy, and they can occur at any time.

"The financial markets respond to events that at first blush may not appear to affect global investment portfolios. For example, the U.S. equity market downturn in the summer of 1998 has been closely linked to the Russian debt crisis and the problems associated with the Long Term Capital Management (LTCM) hedge fund leveraged portfolio. Peak to trough from about July 17, 1998, to August 28, 1998, the SandP 500 dropped by more than 13 percent. Then an additional 5 percent was lost from August 28, 1998, to about October 7, 1998, for a total loss of about 18 percent. The market pundits were attempting to call the start of a bear market — defined by a 20 percent drop. Some investors may have left the equity market at that time. If one were to have weathered the storm and remain invested in the SandP 500 from October 1998 to mid-March 2000, the return would have been more than 50 percent. Granted, the Fed helped out by reducing interest rates and brokering the sale of LTCM. The point is that long-term investors must maintain their strategic exposure to the markets in both upward trending and falling markets. We cannot precisely predict the top or the bottom a priori."

Notwithstanding market overpricing and the subsequent "Internet-o-mania" burst and its shadowy effect on the corporate infrastructure, Dave firmly believes that over the long term the Ciscos, Microsofts and like companies will remain intact, supported by an economic environment of sustainable low unemployment and tame inflation. These companies are providing the infrastructure and building blocks to future creativity and innovation.

Regarding the timely valuation of the UC-managed funds, we wondered, as many participants do, whether the monthly values could be made public closer to the 1st of each month, rather than the 10th of the month. For the most part, the delay is due to what Dave referred to as "pricing challenges" in the fixed income portfolios. Obtaining the value of equity securities is relatively straightforward, because the markets price securities on equal, organized exchanges. Fixed income securities—that is, corporate and government bonds and commercial paper—present more of a dilemma, however, because no single organized exchange in the fixed income markets exists for pricing. This means that banks, governments, and the foreign markets are all vying with portfolio managers and traders for the most accurate prices. And that leads to pricing delays.

Toward the end of our conversation with Dave, we broached the subject of the Treasurer's Office's interaction with the entire UC community—the more than 130,000 faculty, staff, and retirees to whom he and The Regents' Committee on Investments are largely accountable for the investment performance of their retirement savings. We couldn't have anticipated a more positive response. Above all, Dave views Plan participants and retirees as investors and clients and is eager to tap into what he believes are ripe forums throughout UC for investment education. He hopes to work closely with the benefits offices in designing educational videos and presentations to assist participants in their quest for creating Plan portfolios that will allow them to reach their retirement goals. He also reaches out to the students, who ultimately benefit by having professors, lecturers, and research projects supported in part by UC's endowment funds. Dave has participated in the UC Berkeley Alumni mentor program and enjoys helping students design their career path.

We thoroughly enjoyed meeting Dave Russ and have every confidence that he will prove to be a great "asset" to UC. We look forward to future interactions with him and will report regularly on his contributions and progress on the front lines in the Treasurer's Office. Welcome to UC, Dave!

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