By Ed Mendel
Monday, December 19, 2011

Over the last 10 years CalPERS investment earnings are below the median among institutional investors. Are money managers being paid for poor performance?

In a feisty farewell last week, an outgoing CalPERS board member, Lou Moret, called attention to the below-median earnings as Wilshire consultants delivered a quarterly earnings report.

“Is this as bad as it looks?” said Moret, a gravel-voiced boxing referee leaving the California Public Employees Retirement System board this month after nearly four years.

Moret said that during his previous service on the Los Angeles Fire and Police Pensions board money managers with earnings below the median for three or four quarters were dismissed.

“We are glossing over this, and it looks horrible,” said Moret.

Delivering another jab, Moret reminded his fellow board members that CalPERS, the nation’s largest public pension fund, likes to regard itself as a leader among pension funds.

The report shows CalPERS earnings during the last 10 years, 5.4 percent, slightly below the Wilshire median for large funds, 5.7 percent, and a broader Wilshire median for institutional investors, 5.5 percent.

The CalPERS earnings for the last three years, 2.2 percent, are well below the three-year median for the two Wilshire measurements, 4 and 4.2 percent. But CalPERS earnings for the last year, 4 percent, are above the two peer groups, 2.4 and 1.3 percent.

Moret said it’s a problem if a CalPERS failure to take corrective action results in “giving the state a bigger number they have to come up with,” a reference to annual employer pension contributions.

In California public pension funds, investment earnings are expected to provide roughly two-thirds of the revenue. When earnings fall short of the target, the funding gap must be covered not by employees but by the employer with taxpayer funds.

A Wilshire consultant, Andrew Junkin, told Moret that a CalPERS portfolio heavily weighted toward international stocks is “probably swamping” the performance of managers.

Junkin said CalPERS corporate governance funds, after some poor performance, are doing better. He also said that CalPERS has scaled back active managers, relying more on passive management that tracks the market.

Janine Guillot, a CalPERS investment officer, said CalPERS “investment beliefs” limit “home country bias,” expecting greater long-term earnings abroad, and assume big U.S. stocks are efficiently priced, leaving little room for gain from active management.

CalPERS hired a new chief investment officer, Joe Dear, in January 2009. A new CalPERS chief executive officer, Anne Stausboll, had been hired a few weeks earlier in December 2008.

The new management was in place when CalPERS revealed in October 2009 that a former board member, Al Villalobos, received $50 million in fees from private equity firms seeking CalPERS funds.

A state lawsuit contends that a former CalPERS chief executive, Fred Buenrostro, who later went to work for Villalobos, urged CalPERS investment officers to give funds to Villalobos clients.

CalPERS had well-publicized real estate losses when the housing boom went bust, some advised by a firm later dropped by CalPERS. Under new management, CalPERS real estate is aimed more toward income such as rent, not speculative property.

A new CalPERS committee looks at risk management in investments and other operations. Hit by a sagging economy and market crash, CalPERS investments peaked at $260 billion in 2007, dropped to $160 billion and were $220.5 billion last week.

When Dear briefed the CalPERS board last week on economic trouble in Europe, board member Dan Dunmoyer asked if CalPERS will be able to hit its earnings target of 7.75 percent during the next decade and 8.5 percent in the following decade.

“Over 20 years I’m comfortable with our return target,” Dear said. “That’s long enough to ride through these cycles. On the short term, I think it’s going to be difficult, and I have said that. I was advised not to be so pessimistic on my point forecast.”

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