15 December 2015

CalPERS Blinks

After an increasing chorus of criticism the largest pension fund in the nation, CalPERS, has abandoned its plans to relax standards in order to favor private equity:
The state’s biggest public pension fund has repeatedly missed a key performance goal for its controversial private equity investments.

But a CalPERS committee said Monday that the fund’s staff could not strip language from a written policy that required them to aim to meet that benchmark – returns roughly 3% higher than the stock market to compensate for private equity’s risk.

By voice vote, the committee defeated the proposal to change the policy so that the new objective would have been simply “to enhance” the pension fund’s private equity returns.


The suggested policy change had been criticized by financial experts who said it would clear the way for CalPERS to continue to invest in the complex Wall Street sector – the buying and selling of companies -- without requiring higher returns to compensate for the added risk.

"This is outrageous," Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research, a Washington think tank, said before the meeting. "CalPERS can't get over the goal, now plans to do away with goal post.”


The proposed policy change came after many years where CalPERS failed to meet the so-called "risk-adjusted" benchmark.

For the year ended June 30, for instance, private equity earned a seemingly healthy 8.9%, but that was lower than the 11.1% goal.

A recent report by a CalPERS' consultant acknowledged that the private equity investments had also failed to beat benchmarks over the last three, five and 10 years.

Appelbaum said that CalPERS would have made the same amount over the last 10 years if it would have just invested in the stock market – but without the added risks or high fees.
(emphasis mine)

I would note that the abuse of private equity by CalPers, and the increasing furor over its backflips to favor private equity is a direct result of the investigations, and aggressive use of freedom of information act requests, by Yves Smith and the Naked Capitalism team, who have been on this like white on rice.

One think that I have not figured out yet is why CalPERS has been so insistent in pursuing a failed strategy.

The cynic in me assumes that there is some sort of corruption involved.

The realist sees this being driven by blind panic as a historically underfunded institution flails around searching for a magic bullet.

I'm not sure which analysis frightens me more.


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