Tuesday, March 20, 2012

Stat du Jour: "99% of pension funds outperform CalPERS"

I'm thinking there may be a problem in their approach to the business.
From CalPensions:
Nearly all of the nation’s larger public pension funds, 99 percent, have better investment earnings than CalPERS since the economy began a steep drop five years ago, a Wilshire consultant report said last week.
Now the nation’s largest public pension fund, a former investment leader said to have had a “herding effect” on other pension funds in one academic study, is several years into an attempted overhaul.

A conceptual change that emerged from a study two years ago is intended to use “risk” as a way to classify and monitor investments. The shift has begun, but it’s still evolving amid a search for more answers.

Another change would build up the CalPERS investment staff and rely less on outside managers. A new proposal would add 44 investment positions at a cost of $6.5 million, offset by reducing fees paid outside managers by $100 million to $200 million.

The biggest loser, real estate, has moved toward predictable leases and away from speculative developments. A new private equity manager, Real Desrochers, brings more internal management to key investments expected to yield above-market returns.

The one bright spot, bonds, has seen about $7 billion moved in-house. But overall, Wilshire said, earnings continue to be hampered by a stock portfolio skewed toward foreign holdings and a real estate debacle that may be felt for another 10 years....MORE
...When the financial crisis hit in the fall of 2008, CalPERS and other major investors had to scramble to get cash to cover, among other things, the “securities lending” that usually provides a small profit and is said to aid market operations.

“If you don’t have liquidity, and we didn’t, then you are forced to sell your best assets at fire sale prices and mark down the portfolio,” said Dear, “and that’s what happened to us, primarily because of the securities lending portfolio.”

Most famously, CalPERS is said to have raised $370 million by selling 2.3 million shares of Apple in 2008 worth about $1.35 billion now... 
From our Oct. 26, 2008 post, "Calpers Sells Stock Amid Rout to Raise Cash for Obligations":
This is hedge fund behavior, selling your most liquid investments to prop up the illiquid....
They also got bagged by Goldman in their "Long-only index investing" commodities foray:

 CalPERS Playing with Fire

In our July '09 post "CalPERS Clipped for $970 Mil. in Real Estate Fiasco" I said "It's called reaching for yield. And it's stupid, especially when a fiduciary does it."

We have dozens of posts on CalPERS. This outfit is going to cost the taxpayers of California billions over the next decade as markets refuse to accommodate the fund's requirement of 8.5% average annual returns. They have made promises to their public sector retirees that they won't be able to meet and are trying to make up the difference by engaging in behavior that no fiduciary should even contemplate, let alone execute.

If you recall, they were one of Goldman's* largest "long-only index investors" in oil and the GSCI, scaling back only after their commodity bets lost billions....
See also Jan. 2012's: "CalPERS Earns 1.1% in Calendar 2011, a Bit Less Than the 7.75% They Need"