Liquidity Management

Case study

Background

Since 1976, the University’s Short‐Term Investment Pool (STIP)
has served as the primary vehicle for campuses to maximize
current income on working capital. Campuses routinely
depend on STIP income to supplement budgets. By
participating in this large, centralized investment pool,
campuses receive higher returns combined with safety and
liquidity. In 2008, the UC Office of the President (UCOP) and
Office of the Treasurer came together to explore an
investment alternative that would maximize expected return
rather than current income, potentially generating additional
discretionary revenue without generating unacceptable risk.
The team found higher expected returns could be achieved if a
pool like STIP was managed more like an endowment (longterm).
However, such returns were only possible with a “total return”
mandate, i.e., the acceptance of additional risk. Out of this
exploration, the Total Return Investment Pool (TRIP)
was established as a fund alternative appropriate for longer‐term
working capital. Incremental income generated
by TRIP would be available to fund mission‐critical needs,
albeit with some increased investment and cashflow risk. At
their option, the campuses collectively transferred $1.49 billion
out of STIP into TRIP in August 2008, resulting in an 83% / 17%
allocation between STIP and TRIP, respectively, on a combined
market value of $8.9 billion. At June 30, 2010, that allocation
was 84% / 16% on a combined market value of $10.9 billion.
Systemwide, this represents operating liquidity far in excess of
current aggregate needs, which are estimated at $2.0‐2.5
billion. STIP market value has remained above $6 billion since
TRIP inception and is currently above $9 billion.

Goal

As a result of extreme budgetary turmoil faced by the
University in Fiscal Year 2009‐2010, TRIP’s potential to
augment University budgets rose to high‐priority. A renewed
systemwide focus on operational efficiency gave rise to a
renewed interest in optimal utilization of TRIP. In June 2010,
UCOP initiated a fresh examination of systemwide liquidity
needs – namely, the optimal allocation of campus working
capital between STIP and TRIP – and the possibility of a
systemwide, coordinated approach to liquidity management. 

Successes

Despite the initial financial challenges of 2008, TRIP has been
quite successful, returning 13.99% for the 12 months ended
June 30, 2010. However, the 13.99% success came on the
heels of inaugural 11‐month returns (period ending June 30,
2009) of ‐1.55%, although TRIP outperformed its ‐3.20%
benchmark. Annualized returns and corresponding
benchmarks for STIP and TRIP for the period August 1, 2008
through June 30, 2010 appear below: STIP
Annualized return: 3.15%
Portfolio benchmark: 1.19%TRIP
Annualized return: 6.20%
Portfolio benchmark: 5.66%
Thanks largely to TRIP’s initial success, campus leadership has
been receptive to preliminary discussions regarding a
systemwide, coordinated allocation between STIP and TRIP.

Challenges

TRIP is inherently riskier than STIP. Additionally, investments
in TRIP are committed for a three‐year “lock‐up.”4 These
investment/cashflow risks deter greater campus participation
in TRIP. Active marketing and communication with campuses
regarding risks and mitigating factors is an area for
improvement. Furthermore, coordinated, systemwide action
is not an historical tenet of UC culture; devising a plan or policy
to optimize systemwide liquidity will be a challenge. 

Initial investment

Aside from staff time and effort, the physical establishment of
TRIP did not require initial investment; however, TRIP’s success
is attributable in part to the initial transfer of $1.49 billion from
STIP to TRIP, and subsequent investments since. 

Fiscal results, current and anticipated

The annualized TRIP returns shown above imply that each
incremental $1 billion investment in TRIP upon its inception in
August 2008 could have generated an incremental $62 million
in investment income for the University today. As a point of
illustration, if the allocation between STIP and TRIP during the
period since August 2008 had been 60% / 40% (versus 83% /
17%), an incremental $125 million+ could have been
generated, while maintaining overall STIP market value above
$5 billion – twice the estimated liquidity need. 

Current action and next steps

As of May 1, 2011, UCOP has moved $1 billlion from STIP/TRIP for a target STIP/TRIP allocation of 70%/30%. The daily liquidity needs of individual campuses are currently being studied and the possibility of further allocation to TRIP is being considered.  

Concluding statement

UC is entering a new era of operational excellence combined
with long‐held academic and research preeminence.
Optimization of systemwide liquidity undertaken in a
concerted, coordinated manner is integral to UC’s next phase
of growth and success.