CalPERS Policy DecisionSubmitted by Headwater Investment Consulting on July 8th, 2015
By Kevin Chambers
In our recent paper discussing the asset allocation of Foundations and Endowments [insert link], we pointed out how many of the largest Foundations and Endowments are investment “trend setters.” Many investors follow the moves, strategy, and advice of the financial minds that run these large institutions. This is also true for another pillar of financial institutions: pension funds. The California Public Employees’ Retirement System (CalPERS) is the largest pension fund in the United States. CalPERS manages over $300 billion and has made some pretty drastic investment decisions in the last 12 months.
Background of CalPERS
CalPERS has 1.72 million employees that is supports, including firefighters, police officers, teachers, and other public officials. Of these members, 34% are retired and taking benefits, 45% still working, and 21% of members are inactive. Inactive members include those who are not working for CalPERS but have not yet started taking benefits. Of every dollar paid to CalPERS retirees, 67 cents comes from investment earnings, 21 cents comes from CalPERS employers, and 12 cents comes from CalPERS members (CalPERS, 2015). Because the CalPERS system relies of investment income, and because of their size, they were one of the first pension funds to include alternative investment strategies into their portfolio such as hedge funds and private equity (Stevenson, 2015). CalPERS has a 7.5% return goal.
Late last year, CalPERS decided to divest $4 billion of their hedge fund portfolio. They cited high fees and complexity as reasons for exiting (Stevenson, 2015). During the 2008 crisis, CalPERS lost more than a third of its wealth, putting the burden on taxpayers and better investment returns. CalPERS paid $135 million in investment fees for the fiscal year 2014 that ended June 30th. The hedge fund portion of the portfolio contributed 0.4% total return, after fees. Over the last 10 years, the hedge fund portion of their portfolio has returned 4.8% (Marois, 2014).
In early June 2015, CalPERS announced that they are reducing their number of fund managers by half (Dieterich, 2015). CalPERS has about 212 external money managers and paid $1.6 billion in management fees last year. The number of mangers will be reduced to 100. The number of private equity firms will decrease from 98 to 30 and real estate managers from 51 to 15. They will also cut down their number of general actively managed equity funds from 44 to 20. Again, their reason for cutting mangers is to lower costs and reduce complexity (Stevenson, 2015).
Blazing the Path
CalPERS is a leader and trend setter, similar to many of the largest foundations and endowments. Being a public entity, CalPERS also has to deal with some political issues. Many taxpayers want to know that their pension money isn’t paying undue to fees Wall Street. This is especially true when states, like in California, call on tax payers to bailout their shortfalls. It will be interesting to watch the effect that the CalPERS changes have on pensions across the country. Big institutions like pension funds move slowly. It will probably be a few months before the effects are known, but expect other state pension funds to follow suit.
CalPERS. (2015). CalPERS at a Glance. Sacramento: CalPERS.
Dieterich, C. (2015, June 8). CalPERS to Axe External Money Managers By Half. Barron.
Marois, M. (2014, September 15). CalPERS to Exit Hedge Funds, Divest $4 Billion Stake. Bloomberg.
Stevenson, A. (2015, June 8). CalPERS to Cut Ties With Many Fund Managers to Save on Fees. New York Times.