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CalPERS Adopts New Investment Plan
Ron Trujillo of the Sacramento Business Journal reports, CalPERS adopts new investment plan:
California
Public Employees’ Retirement System has adopted a new asset-allocation
strategy in order to better prepare for risk-adjusted performance in
the investment world.
The nation’s
largest pension fund, with a $220 billion portfolio, will focus on risk
and return as economic growth, inflation, liquidity and interest rates
— and has outlined asset-allocation mandates. CalPERS, like most
investors, battled a difficult market and disappointing results during
the recession, but has posted much-improved performances recently.
“We
learned in the financial crisis and the past recession that a
liquidity crunch or inflation can have a significant impact on portfolio
performance in ways that many investors didn’t anticipate,” CalPERS
board president Rob Feckner said in a news release Monday. “We focused
on assets and returns, but not enough on the risk of our allocations.”
The board adopted the new strategy after a yearlong review.
CalPERS will place assets in five major groups determined by how they function in high- or low-growth markets:
• Liquidity — Cash and government bonds, which can be converted quickly into cash. Target allocation of 4 percent.
• Growth — Stocks and private equity at 63 percent of assets.
• Income — Fixed-income securities with established income returns, with an allocation of 16 percent.
•
Real — Real estate, infrastructure and forestland to provide long-term
returns and considered less volatile to inflation. Target allocation
of 13 percent.• Inflation — Commodities and inflation-linked bonds, with an allocation of 4 percent.
The
board also approved set ranges for investing, for example, a 7 percent
positive or minus range for public and private equity.
“While
the allocation won’t change much, we’re going to be looking at these
assets differently than we did before,” said George Diehr, chairman of
the CalPERS Investment Committee. “We now have a better way to look at
risk and account for what’s happening in the markets and to
re-categorize our assets according to what drives them. We’ll be able to
better anticipate overall performance and its potential impact on
employer contribution rates and our retirement system’s funded status.”
Historically,
investment earnings have accounted for about 64 cents to 75 cents of
every pension dollar. The remainder comes from employers and active
employees.
“You can’t get solid
returns without taking risk, but we want to make sure we know what risk
is and that we’ll be paid to take it,” said Joseph Dear, CalPERS chief
investment officer.
CalPERS handles retirement benefits for about 1.6 million state and local public agency employees.
I
am glad to see that CalPERS is taking a strong look at risks they're
taking. Beta will swamp the overall portfolio, but if they can do a
better job protecting downside risk with this new asset allocation, then
so much the better.
In related news, Bloomberg reports that CalPERS should impose a “cooling-off” period restricting how quickly former executives may take jobs with money managers, its outside lawyers recommended:
Calpers
staff and board members who leave should be prohibited for two years
from taking a job with any company that was awarded $10 million or more
in business during the previous five years, said a report today from
Steptoe & Johnson LLP, the law firm hired to examine practices of
the fund, which has $218 billion in assets.
The
California attorney general’s office accused former Calpers board member
Alfred Villalobos of trying to improperly influence the fund’s
personnel to favor Apollo Global Management LLC
and other private-equity clients. Federal and state agencies are
probing influence peddling for access to the $2 trillion in U.S.
public-pension funds. Villalobos has denied wrongdoing.
“We take
these matters with the utmost seriousness,” Anne Stausboll, the fund’s
chief executive officer, told the board today. “Our goal is to make sure
we have corrected the problems and that never again has Calpers’
credibility been called into question.”
The report recommends
that board members and executive staff be prohibited from taking jobs
during the cooling off period with firms known as placement agents that
act as middlemen to win investment contracts for clients.
On
Oct. 1, Governor Arnold Schwarzenegger signed a law prohibiting money
managers from paying contingency fees to middlemen who help win state
retirement-plan contracts.
The fund in November agreed to rules
compelling any company seeking a contract worth more than $10,000 to
report hiring a placement agent to win Calpers business. The rule also
requires disclosure of how much was paid and for what services.
I
would have put the prohibition of staff and board members to join a
fund CalPERS invested with to five years or a minimum of three years. As
for middlemen, get rid of them. CalPERS doesn't need them.
Finally, John Emshwiller and Michael Corekery of the WSJ reports, Calpers Review Recommends Fee-Payment Change:
A
special review, spurred by a scandal at the nation's largest public
pension fund, recommended that the California Public Employees'
Retirement System make potentially major changes in how it pays money
managers.
The review, led by law firm
Steptoe & Johnson LLP, urged that Calpers move to a system in which
"nearly all" of a money manager's compensation come from
profit-sharing, rather than "management or other fees."
Calpers's
board asked the pension fund's staff to come up with a plan to
implement the recommendations. Those details will be reviewed before
the board votes on whether to adopt the proposed changes.
Monday's
announcement could give a push to efforts already underway at some
large public pension funds to rein in fees paid to investment firms
that manage their assets. Many pension funds had painful losses during
the financial crisis, and some are under pressure to revamp internal
practices because of the pay-to-play scandal.
Calpers has about
$220 billion in assets and paid $929 million in active
investment-management and performance fees in the fiscal year ended
June 30. The pension-fund system recently has won fee reductions
totaling as much as $300 million, including from high-profile
private-equity firm Apollo Global Management. An Apollo spokesman
declined to comment but previously the firm said the Calpers agreement
"establishes a new standard for aligning the interests of our firm with
those of its largest investor."
The
proposed changes by Calpers would mostly hurt private-equity and hedge
funds, typically paid a management fee of 2% of the total invested,
regardless of performance. Such investment firms also usually get a 20%
slice of overall profits. About 14% of Calpers's assets are in private
equity, while 4% are in hedge funds.
The nine-page report
suggested that Calpers has been paying overly high fees and providing
"an unnecessary source of profit" to money managers.
"It's
a big deal," said Colin Blaydon, director of the Center for Private
Equity and Entrepreneurship at Dartmouth College's Tuck School of
Business. "With the anticipation that performance is not going to show
capital gains for the next few years, management fees are a big and
steady source of revenue."
Mr. Blaydon said he expects the findings to embolden other public pension funds to scrutinize investment fees.
New
Jersey's $75 billion state pension-fund system recently negotiated
"significant" fee reductions with about five of its alternative-asset
managers, said Tim Walsh, director of the fund. "These fees in many
cases were negotiated two to five years ago, and the world has
changed."
Mr. Walsh said he doubts that pension funds can do away
entirely with management fees because demand remains high for
successful hedge-fund and private-equity firms. "The fund is not going
to cut their fees in half to satisfy one client," he said.
A
Calpers spokesman declined to say how broadly or deeply the fee-cut
recommendation might extend. The pension system's board is expected to
consider the findings in 2011. "It is really too early to say at this
time," the Calpers spokesman wrote in an email.
The advisory
report also recommended curbs on the use of so-called placement agents,
who are paid to help secure investments from Calpers and other pension
funds. The controversial practice has sparked investigations, civil
lawsuits and prosecutions alleging that some placement agents
improperly influenced pension-fund officials in return for hefty fees.
California's
attorney general filed a civil suit earlier this year against two
former Calpers officials tied to the pay-to-play scandal. Both
defendants have denied wrongdoing.
In this investment environment, it's hard to justify high fees and
absolutely ridiculous to pay 2 & 20 for leveraged beta! The big fat
fee days are over for hedge funds and PE funds. Even the best funds will
feel the heat.
You can download the report and recommendations by clicking here.
Given that CalPERS is the largest US public pension plan, I wouldn't be
surprised to see others following suit. Canadian public plans should
also take notice as some of these recommendations might find their way up here one day.
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All those unfunded pension liabilities. I wonder if anyone has determined what the compunded annual returns have to be in order to meet these future obligations? My guess is that it would be north of 20%.
...which gives you an idea of how much of your wealth will need to be confiscated. No way those pensions won't be paid.
Your analysis are getting very professional Leo.
Good article Leo.
I can see them all right now in my minds eye, sitting around a huge mahogany table a decade ago, looking questionably at each other...vat ez dis risk deh keep talking about, es not our money.
Then this;
"On Oct. 1, Governor Arnold Schwarzenegger signed a law prohibiting money managers from paying contingency fees to middlemen who help win state retirement-plan contracts."
The world of government moves glacially slow...one would have thought the spectre of a high profile hedge fund, with a Car Czar sitting at it's head no less, engaged in the same activity, with the activity occurring in another high population state completely saturated with media, would have given rise to a faster response (Quadrangle/Steve Rattner/NY).
Back on risk. I would love to see a chart comparing CalPERS losses to those of ordinary 401k/IRA investors, if any.
My suspicion is 401k'ers did better.
“You can’t get solid returns without taking risk, but we want to make sure we know what risk is and that we’ll be paid to take it,” said Joseph Dear, CalPERS chief investment officer.
Sounds like someone still thinks risk premiums between asset classes actually exist.
Why no blackjack and table games allocation? Makes as much sense as 63% equity exposure with fund managers who have absolutely no idea how to hedge exposure.
Nice run down Leo... Thanks.
Stocks/Private Equity.......63%
63%..Best Case....Sideways on an inflation based adjustment.
63%..Worst Case..Down the shitter altogether.
Smart...Very Fucking Smart.
common sense suggests their equity position and fixed income position should be switched, but I know, lets wait until stocks collapse, (ah ah not with QE^ waiting in the wings), rather than take a tough stance right now that would preserve capital, I wonder how many of them have heard that term, preserve capital. I'll repeat the solution as I see it, float the currency M2 vs other than M2. Let the market set an exchange rate, so Bernananke wants to screw with printing money, make the notional money trade against the real thing. and of course don't let the Fed park their cash in any M1 M2 accounts, but Ron Paul can keep them from doing that, only the Congress has the right to print money.
Amazing. $200B and such a novice approach to risk.
The public employee retirement in Ca. was and maybe still is, set up with retirement benefits that are not doable. California has killed the Golden Goose. IOUs may be issued says incoming Gov Brown(didnt say for what). Wonder if there will be synthetic IOUs? Bet some one will leverage them. Jokes aside, I will not be suprised if there is not some sort of trading in California IOUs.
We learned in the financial crisis and the past recession that a liquidity crunch or inflation can have a significant impact on portfolio performance
Is this shit serious? At one of the largest pensions in the world, they had to go through a crisis for the BOD and Chief Investment Officer to tumble to these deep thought moments?
I'm the CFO of a multi-hospital delivery system - this is like me telling my CEO "Heck, sorry we had to go through that terrible year where we lost $200 million due to those completely forseeable events. I learned through that crisis that we should try to control costs so they're less than our revenues. How about a raise?"
...You can’t get solid returns without taking risk,..."
Just a leech on OPM. Has no idea that words have actual meanings.
The opportunities for corruption/fraud, and paid-non-performance WAS obviously VERY high, now it is STILL HIGH...what bullshit...management fees...with the AMOUNT OF MONEY, and the statistics of large numbers, CALPERS should be buying recognized index funds only, and in true UNCORRELATED diversity....indeed these tasks would best be done by COMPUTERS appropriately programed, and REMOVAL OF ALL SO CALLED ADVISORS, MIDDLE MEN....charging 1-2% regardless of performance...THATS WAY TOO MUCH 'TAKE AWAY'