University of California
Office of the President
February 15, 2001
Dear Professor Schwartz:

I apologize for the long delay in responding to your specific requests for information concerning
The Regents' investment policy for the University of California Retirement Plan. The questions
you raise are serious, however, and require a response that can hopefully supply the information
you wish without compromising the necessity of maintaining the confidence of information and
actions properly taken i[n] closed sessions in full compliance with California statutes.

For the specific questions concerning the data and calculations in the Asset Allocation Plan
adopted by The Regents contained in your letter of September 21 and in the reports on your
website, I have asked Wilshire Associates to provide information which is attached.

Hopefully this will assure you that the recommendations made in the study were soundly based.
The plan was developed in cooperation with the Treasurer's office and was thoroughly reviewed
by the Investment Advisory Committee and the Investment Committee of The Regents, many of
whom have substantial investment and management experience, as well as by the full Board of
the Regents where the plan was adopted unanimously. The conclusions of the plan, moreover,
were not radical and conform to a large degree with the investment strategies of many large
public retirement funds.

In the final analysis, however, as I am sure you will agree, the quantification of expected
investment results i[s] still a highly subjective activity, heavily dependent upon assumptions and
extrapolations of past experience. Reasonable and competent people can disagree on predicted
results and differences do occur as you note in your use of data from Callan Associates. It is our
belief that these differences do not invalidate Wilshire's conclusions and that their explanation of
the techniques they used in developing their numbers can allay your concerns.

In viewing the totality of the recommendations it is also my belief that they constitute a more
conservative investment policy than has been employed in the recent past, along with the
expectation that returns will be at least as strong as in the past. A well diversified index core of
equity securities can serve as a strong anchor for a portfolio, which will generate market rates of
return. The actively managed equity portion of the portfolio can then be managed to develop
incremental return in response to shifts in emphasis and earnings expectations of the market.
The recommendations for the fixed income portion of the portfolio also reduce risk by shortening
duration and diversifying investment sectors. Meanwhile the bulk of the investments continue to
be managed by the personnel in the Treasurer's office whose performance can now be effectively

You should also know that at the January Regents' meeting a report by Towers, Perrin, the
actuary for the pension plan, was presented in connection with the action taken to improve the
benefit structure of the plan. This report extrapolated the value of assets and liabilities for the
plan for the next twenty years using the Wilshire return assumptions which the actuary
independently deemed to be appropriate. Their projections show that there is only a 20%
probability that additional contributions will have to be made to the plan within the next 20 years
and a 0% probability that they would have to be made within 5 years. These assumptions fully
incorporate the improved benefits. While the good investment returns generated in exceptional
markets over the past fifteen years have enabled the plan to achieve this favorable funded status,
prudent practice suggests that solidifying these gains in a more conservative stance is appropriate
at the present time.

Employment of a consultant to independently suggest strategy and review performance is a
common practice among large fiduciary funds and is considered to be a best practice by fiduciary
attorneys and the Department of Labor. With the assistance of a professional consultant, The
Regents now have the ability to fulfill their responsibilities to monitor the performance of the
retirement fund and its managers and to make strategic and personnel changes when necessary.

We welcome your criticism when justified by facts and presented in a positive context of
achieving mutually desirable goals. We all benefit from good performance of the retirement
fund and are convinced that The Regents share similar goals.


Joseph P. Mullinix
Senior Vice President - Business and Finance