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In November 2000, in accordance with Wilshire's recommendation, UC traders sold nearly $11.6 billion in stock in a single week. That's according to Jeffrey Heil, who managed the equity division at the time and claims the move was perfectly appropriate. But Small insisted that it was irresponsible. In her letter to the regents, she wondered at the rashness of the act: "How could Wilshire have ever recommended the speed of such a major change?" she wrote.
That was just the start of the outsourcing. By late 2002 the university had laid off all its in-house equity traders and was paying millions to external fund managers to oversee its entire stock portfolio. According to Heil, who lost his job in 2002, that move led to a steady erosion in profits. "All they were doing was paying these expensive outside firms with high fees to do the same as we were doing in-house, but at a much higher cost," he said. "They were overpaying in management fees and getting underperformance from their managers kind of the worst of both worlds."
Because investments are always more volatile in the short term, it would be unfair to judge Wilshire based on the UC fund's performance a short time after Small's ouster. But over almost seven years, the numbers have shown a sustained pattern of mediocre profits. Nearly every pension portfolio in the country is now doing better than the university's. According to a report by State Street, the university's custodial bank, 86 percent of large US investment trusts outperformed the UC pension fund from 2001 to 2006. Figures from the National Association of State Retirement Administrators and the investment firm Northern Trust also highlight the university's subpar returns. Had the pension plan even performed as well as half of its peers in the five years ending June 30, 2006, it would have netted an additional $3.3 billion.
When asked about this downturn, the treasurer's office responded that its portfolio had beaten an important industry benchmark, the S&P 500/Lehman Aggregate portfolio, between 1999 and 2006. But that calculation includes the 1999-2000 fiscal year when the fund, still under Small's leadership, beat the S&P 500 by a country mile. The university is using results from the very investment philosophy it repudiated to obscure the failings of its new strategy.
Even some of Parsky's peers have complained. "A number of regents have asked why the university's returns are not comparable to those of other educational institutions," the minutes of an investment committee meeting stated last year. "Regent [Paul] Wachter recalled that a chart showing investment results for seven large universities had appeared in The Wall Street Journal. The results for the University of California were the worst among those institutions. He questioned why UC cannot perform as well as Harvard."
Despite the fund's poor showing, at least a few parties made out like bandits. In fact, the close dealings between Wilshire Associates and the university raised questions about conflicts of interest. Besides the suspiciously timed Bush campaign contributions, UC eventually hired Wilshire to implement its own recommendations. This violates a fundamental ethical principle, said Edward Siedle, a former Securities and Exchange Commission lawyer who has investigated pension fund abuse for 25 years. "It's like you going to a Ford dealer and saying, 'I'll give you a hundred dollars to tell me what car to buy,'" he said. "And they'll say, 'Great, buy a Ford.'"
Connerly also objected to giving Wilshire the second contract. He complained, according to the minutes of one meeting, that "by recommending a consulting fee of $400,000 in the plan, Wilshire had effectively determined what its fee should be." In addition, he argued that hiring Wilshire would set it up to win yet another contract this time to serve as the university's general pension consultant. "Connerly suggested that the continued retention of Wilshire Associates would provide them with an advantage over other firms," the minutes stated.
Sure enough, Wilshire scored the general pension consultant contract a year later, a deal worth more than $1.3 million over three years. And while serving in this capacity, Wilshire sold the treasurer's office access to its proprietary Compass software, netting itself $108,000 more.
This isn't the first time Wilshire's conduct has been questioned. In late 2003, according to a story in Money magazine, Wilshire was implicated in a "fast trading" scandal in which company officials used specialized knowledge of overpriced securities to rapidly buy and sell millions of dollars in mutual funds, netting a tidy profit without any risk, but running up the commission costs for small-time investors. The scheme was perfectly legal, but reeked once again of conflicts of interest. Mutual-fund managers knew that Wilshire, as a pension consultant, could recommend them to handle money for Wilshire's pension-fund clients, so they had a strong incentive to let the firm dip in and out of their funds. That scandal may have made Wilshire too hot for the university when its contract expired in 2004, the regents went with another company.
But the damage was done. Letting Wall Street handle its pension portfolio has cost the university a fortune in yearly fees and commissions, even as profits have lagged. Under Small's leadership, the fund spent roughly $5.5 million a year to buy and sell bonds and almost nothing to trade stocks. The year after her resignation, bond commissions jumped to $11 million last year, the university paid more than $22 million. Meanwhile, UC paid private fund managers $32 million last year to trade stocks it used to handle in-house.