CalPERS Announces Preliminary Returns of 0.6% When Target is 7.5% (Updated)

We posted last week on an OC Register story that anticipated, using CalPERS’ daily transaction reports, that the giant pension fund would show a loss for its fiscal year ended June 30.

Although we noted that the OC Register is a long-standing critic of CalPERS (and often on thin grounds), we were remiss in not recognizing that the daily transaction report included inflows and outflows from sources and uses other than investment activity, as in pay-ins from various participants and payouts to beneficiaries.

So even though the preliminary report for the fiscal year just ended is still bad, it’s not as horrific as the OC Register expected. From CalPERS’ press release:

The California Public Employees’ Retirement System (CalPERS) today reported a preliminary 0.61 percent net return on investments for the 12-month period that ended June 30, 2016. CalPERS assets at the end of the fiscal year stood at more than $295 billion and today stands at $302 billion.

Mind you, this is relative to a return target of 7.5% and is footdragging about lowering it despite investment returns falling all over the world as a result of central bank polcies. As we noted earlier:

CalPERS, like virtually all of its peers, is in deep denial about its fix. It still maintains a return target of 7.5% even though Governor Jerry Brown pressed for the pension system to lower it to a less unrealistic 6.5%. CalPERS’ response was to invent a Rube Goldberg process by which it would lower its targets in those years it beats its 7.5% return target over the next 20 years till it gets to 6.5%. That is an oversimplification but directionally correct.

And how did private equity do? Well, it returned 1.70%…which was better than public equities at a 3.38% loss. But the private equity and real estate values aren’t comparable to the public market values. CalPERS is using data from March 31. However, US stock market indices were generally higher as of June 30 than as of March 31, so there might be some improvement. Offsetting that is the ongoing issue that private equity valuations are not verified by independent parties and are acknowledged to be generous in down or weak markets.

Ironically, we did CalPERS a favor short term by helping thwart its plan to go to a bogus “absolute return” framework rather than sticking with a risk-adjusted approach. Private equity returns fell short of those for fixed income (9.29%) and real assets (5.99%). But it did beat its benchmark…presumably for the nine months….by 253 basis points.

And even though CalPERS may contend that it did pretty well, its public equity returns of -3.38% were lousy because CalPERS continues to have a very high allocation to foreign stocks when the dollar is strong and most other economies are in or near deflation. As we pointed out in our earlier post, a typical 60/40 domestic stock/bond mix would have produced returns of 5%. While some foreign currency exposure is considered desirable (as representing diversification by asset class, even though CalPERS does not represent it that way in its press releases or other periodic presentations), a 50% foreign market allocation is high. CalPERS beneficiaries and California taxpayers are paying for a bet that is not well reported.

Reader Jim Haygood, who has taken an interest in CalPERS, is appalled by the caliber of disclosure, since it falls well short of what retail investors receive. From a comment on last week’s post:

After further research, it appears likely that what Calpers calls “Barclays Long Liabilities Index” — a term that doesn’t appear on Barclays’ site — probably is the “Barclays-Russell LDI [Liability Driven Investment] Index,” which is geared to use by pension funds:

http://www.ftse.com/products/downloads/Barclays-Russell_LDI_Index_Series_Methodology_Overview_FINAL.PDF?32

Barclays-Russell LDI Index comes in six durations, the longest being 16 years. If this is in fact Calpers’ benchmark, it’s incredibly sloppy for Calpers to misstate the index name and fail to stipulate its duration, which is quite material.

The 16-year Barclays-Russell LDI index was up nearly 22% in the year to June 30th. If that’s the one Calpers uses, my estimate of their total benchmark (post above) changes to 3.5%…

As another example of Calpers’ casual sloppiness, their asset allocation page contains links in the right hand column to the 2013-14 annual investment report and 2013-14 CAFR — even though these documents were superseded six months ago with updates for 2014-15.

https://www.calpers.ca.gov/page/investments/asset-classes/asset-allocation-performance

Never do I see such negligence on mutual fund and ETF sites. They are rigorous about maintaining up-to-date documents and identifying benchmarks correctly, because they can be sanctioned if they don’t.

Calpers seems to have a problem. If I were a FOIA warrior, I would be all over their careless ass.

And from a comment in Links yesterday:

This announcement is bizarre in a couple of respects. First, stale results for real estate, private equity and some inflation assets likely will have a material impact on performance. Markets moved a lot from March 31st to June 30th this year.

Why not wait for 2nd quarter reports — probably available not long after July 31st — instead of going off half-cocked with lagged results that will change?

A second bizarrity is that each asset class is compared to its benchmark in a table. But the final step of calculating the overall benchmark, using the weights of each asset class, is missing.

Did the “preliminary” 0.61 percent return beat the overall benchmark? I estimated CalPERS’ overall benchmark return at 3.6 percent, so it might be about a 3 percent shortfall. But it’s useless to speculate with stale figures.

If I had retirement assets at CalPERS, I would be frothing at the mouth over their slapdash lack of professionalism. As we can all see, they are not SEC regulated.

CalPERS’ defenders contend that the press would be all over the state agency if it “delayed” reporting results, since it has conditioned the public to expect them in mid-July. And it would have to wait longer than sometime in August, since CalPERS generally publishes its PE results 3-6 months in arrears. So now they are arguably hostage of this bad practice.

I’ve pointed out sloppiness and even errors in private equity records I have gotten from CalPERS via Public Records Act requests. It took literally months to get a sort-of complete list of private equity investments, and that was after we identified over 70 investments that appeared to be (and in most cases were) missing. And the worst was that given how many go-rounds it took to get a better list, both I and the Wall Street compliance veteran who was working with me were convinced the problemm was their records, as opposed to trying to stonewall me.

So there’s a lot for the new CEO to do. Let’s hope she is up for the task.

Update: Haygood surmises CalPERS might have come close to meeting their benchmarks…since they might be using a different bond index than he originally used (recall he complained about the failure to clarify). Bt if they’d been close, you think they would have mentioned that as an ameliorating factor. Oh, and notice he flags another error in their reporting. Hoisted from comments:

Using asset class weights from Calpers’ total fund investment policy (61% equities; 20% fixed income; 6% inflation assets; 12% real assets; 1% liquidity), the figures given in Calpers’ July 18th press release can be weighted and summed.

Result: overall weighted return of 0.81%, versus 0.79% overall benchmark return. The 0.2% difference from the 0.61% headline return in the July 18th press release likely is because asset weights drifted from their targets. All these values use lagged (1st quarter) returns on private equity, real assets and some inflation assets (commodities), accounting for about one fourth of the portfolio.

From a table on page 62/224 of the 2015 CAFR, “Debt Securities Subject to Interest Rate Risk,” the weighted duration of Calpers’ fixed income portfolio can be estimated at about 8.6 years. (Durations are incorrectly stated as percentages rather than years in the table, but we’ll overlook that bizarrity.)

Calpers’ July 18th press release indicates a 9.31% return on their “Barclays Long Liabilities” bond benchmark (whatever that is). Both this 9.31% return, and last year’s 8.6 year weighted duration, are more consistent with the Barclays Russell LDI 8 Year index, rather than the LDI 16 year index I used before, misled by the word “Long.” We’ll find out for sure when Calpers responds to my FOIA request.

Incorporating this shorter duration bond index, which returned less than the ultra-long bonds, Calpers’ overall benchmark return is now re-estimated as 1.4%.

In early August when NCREIF posts 2Q 2016 values for its property and timberland indexes, all of the public indexes will be available to finalize Calpers’ benchmark return for June 30, 2015 through June 30, 2016.

But owing to lagged reporting from partnerships, Calpers’ actual performance for the period won’t be known until the CAFR dated Dec. 31, 2016 is posted.

One calendar quarter lags on a fourth of the portfolio make a mess of trying to track Calpers’ portfolio against its benchmark contemporaneously. Values from the July 18th press release, weighted as described, imply that Calpers roughly met its benchmark. This may change when the lagged 2Q values become available, six long months from now.

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27 comments

  1. Steve H.

    Last time I brought this up I got dunked, but the Vanguard 500 Index Fund returned 3.84% over the last year. My math sez the better than twice as good as 1.70%. I think the fee structure is better too.

    So what am I missing?

    1. Larry

      In the article private equity investments returned 1.7% and public equities returned negative 3.3%. Negative because CALPERS was heavy into foreign equities. As the article notes a mix of domestic bonds and equities would have returned ~5%.

      1. Yves Smith Post author

        No, no, no! Haygood’s estimate of a 60/40 domestic stock/bod mix is around +5%., and his best guesstimate of their benchmarks and allocations is 3.5-3.6%. CalPERS’ bond portfolio earned over 9% last year.

          1. vidimi

            i’m only pointing it out not because i don’t think you know the difference but that you may have not seen the difference with a small enough font

          2. Yves Smith Post author

            *Sigh*. No he is not. He states public equities showed a return of -3.3% which is a LOSS. He incorrectly states that the article says a domestic mix of stocks and bonds would have returned -5%, which is an even bigger LOSS. In fact, Haygood pointed out it would have been a PROFIT of ~ 5%.

            And he was writing to disagree with Steve H, who said “Gee Vanguard did better than CalPERS did in PE. What am I missing?”

            So

            1. Larry addressed a totally different issue than what Steve H was talking about (public v. private equity returns) and

            2.He incorrectly said a standard mix of domestic stock and bonds would have produced a loss.

    2. CAFR1

      2015 CalPERS CAFR – https://www.calpers.ca.gov/docs/forms-publications/cafr-2015.pdf

      Review “Actual” gross rates of return vs. “Net” rates of return. Payouts vs. Contributions.

      Note that payouts are projected based on “Participants expected salary at time of retirement”. Actuarial projections are set on the projected cost basis “at time of retirement” and not what the participants salary is today. Projections are made 25-30 years out. EXAMPLE: New participant’s salary today $45,000 and projected at retirement in 30-years $135,000 and thus on the projected cost basis the fund’s liability is substantially higher.

      INTENT: The bigger the fund balance, the bigger the power base held under management.

      1. CAFR1

        Also, keep in mind the fund is “strictly participatory”. It is like buying a train ticket to ride from NYC to LA, CA. NYC (retirement) and LA, CA (when you die). With a train ticket, when you get to LA, CA would you try to walk off with the seat and the fire extinguisher on the wall? No you would not. You do not own one piece of the train, you just had a ticket to ride. As is the case in most large local government pension fund systems, the participants just have a “ticket to ride” under contract and do not own 1c of the fund’s balance. The local governments participating own 100% of their share in the funds balance.

        As was the case at the end of 2008 with the real-estate bubble burst and severe downturn in the economy that followed, California local government laid off 12,000 employees that now, poof, disappeared from the retirement system liability figures.

        1. How many billions in liability just evaporated with that layoff?

        2. Did local governments pull the now surplus equity from the pension system accounts they were participating in?

        3. When the economy improved 2010 to 2015 and local governments “re-hired” did they replace the money they pulled or did they just start a-new with the new-hires and new actuarial projections per the fund’s balance needs to be fully funded at cost projections for those new-hires at time of retirement?

        The above three questions are very relevant as to “how” this retirement system is operating.

        A review of the 2009 CalPERS CAFR may shine light on those 3 questions – https://www.calpers.ca.gov/docs/forms-publications/cafr-2009.pdf

  2. Badbisco

    I work in investment consulting for foundations, endowments, dc plans, and pensions. The use of Perf data one quarter in arrears is standard for the private investments of most clients.

    Haven’t looked at any Calpers details but assets reported using 3/31 rather than 6/30 values are the result of 6/30 capital statements not being available yet. There is usually a 2-4 month delay in receiving the quarterly capital statements for buyout PE, venture PE, private energy, or private real estate funds.

    Waiting for these statements would delay the reporting significantly, so most simply report the values and performance for these funds a quarter in arrears.

    1. Yves Smith Post author

      I’m aware that the data comes in a quarter late, even longer at CalPERS. Have been reporting on PE since 2013. The reason for the leisurely-ness at CalPERS may be the size of its portfolio, which it has said it will reduce (in terms of number of funds). It would take only laggard in getting results to hold up the disclosure. Admittedly, if CalPERS (and other public pension funds) were holding back reporting results to get PE in for their fiscal year reporting, you could expect it would have become the norm for PE funds to get their reports in for that quarter punctually. But that isn’t the way the industry evolved.

    2. Jim Haygood

      Thanks for your insight. As best I can see from last year, Calpers announced a preliminary return of 2.4% in mid-July 2015. Then apparently there was radio silence until Dec. 31, 2015, when the CAFR was released.

      https://www.calpers.ca.gov/docs/forms-publications/cafr-2015.pdf

      In the CAFR, investment performance is reported on page 107/224 of the PDF: 2.4% actual return vs. 2.5% Asset Allocation Policy Index (CalPERS overall benchmark). The slight shortfall wasn’t mentioned in either CEO or CIO management discussions.

      The fixed income benchmark is stated as “90% Barclays Long Liabilities,” an index which doesn’t appear on Barclays’ index site. Currently I have a FOIA submitted to CalPERS, seeking to identify this index so it can be tracked.

      Calpers’ real estate benchmark, NCREIF ODCE, will be posted at the end of July. If Calpers fixed income benchmark can be identified, then Calpers overall benchmark return can be estimated quite closely. A current rough estimate is about 3.6% for June 30, 2015 to June 30, 2016, indicating about a 3 percent undershoot in investment performance.

      To be continued …

  3. Jacob Wilson

    Considering the new CEO is still “pursiing college degrees”…..you read that right, i wouldnt hold out any hope she’ll be able to help. Not to mention Calpers CEOs have never been involved on the investment side of things (Buenrostro anyone?)

    These dismal returns just strengthen the case against Eliopoulos, he isnt suited or competent enough to be playing CIO. just take a look at his incoherent video rambling about “diversification” and “a portfolio of scale”, and despite being “long term investors” he places blame on short term market volatility.

    The dirth of leadership across this agency and country is truly astounding

    1. Sluggeaux

      Natch.

      Making Elioloupos (a lawyer) CIO was a huge mistake. Just like the victims of the Madoff Ponzi, the politics of this Board seem to favor the magical thinking that “insider trading” is a viable investment strategy, based on connections rather than actual financial analysis. After all, everybody here is above average, right?

  4. oho

    “. As we can all see, they are not SEC regulated.

    Dept of Labor regulated. And the poliltical appointees who lead DOL aren’t really interested, nor have the background, in the pedantic tedium of regulating pension funds.

    1. Fraud

      Not correct.

      Public pension plans in the U.S. are not subject to the provisions of Erisa regulated by the Dept. of Labor. The only Erisa provisions that apply are the IRS ones.

    2. Yves Smith Post author

      No, public pensions funds are NOT governed by ERISA, so they are not regulated by the Department of Labor. Only private pension funds are. Most public pension fund comply voluntarily with ERISA. The section of the California Constitution that governs public pension funds has language that track ERISA’s duty of care, but not its duty of loyalty. And no California regulator oversees CalPERS.

  5. BigFire

    This is what happens when the fund managers are more interested in virtue signaling and social justice cause than actual return for its captive payee (both the employee and the state of California).

    1. Yves Smith Post author

      Huh? Please tell me how being invested in private equity, which fires people and strips employees of their pensions,or investing in infrastructure, which amounts to looting states and municipalities, or being overallocated to foreign stocks, has anything to do with “virtue signaling.”

      Better trolls, please.

    1. Jim Haygood

      Her statement:

      “When you’re looking at the low rate of return environment in the public markets, I don’t think you can ignore private equity,” Marcie Frost, who was named Thursday as the pension fund’s next CEO, said in a telephone conference with reporters. “This could be a low-rate environment for a period of time and we have to factor that in when we do our allocation work.”

      Reading between the lines, what she’s proposing is “leverage plus [nearly] free money.”

      Great time to lever up, as the eighth year of a economic expansion begins! /sarc

    2. Yves Smith Post author

      I was on the call. Bloomberg is projecting something onto what Frost said that was not there via cherry-picking.

      Three reporters were pressuring her to say she’d allocate more to PE. She made clear she hasn’t talked to any of the staff at CalPERS and this was just a “get to know you” call. She said that she believed PE had to be part of the portfolio. That is what any consultant will tell a pension fund these days and it would be really sticking your neck out from a fiduciary duty standpoint to buck your advisors (as in fiduciary duty is about process, and if you get the Orthodox Professionals Seal of Approval, all will be well). She also said that she was sensitive to the controversies surrounding PE, namely the fee levels and lack of transparency, and appreciated that CalPERS was acting as a leader on those fronts.

  6. Jim Haygood

    Using asset class weights from Calpers’ total fund investment policy (61% equities; 20% fixed income; 6% inflation assets; 12% real assets; 1% liquidity), the figures given in Calpers’ July 18th press release can be weighted and summed.

    Result: overall weighted return of 0.81%, versus 0.79% overall benchmark return. The 0.2% difference from the 0.61% headline return in the July 18th press release likely is because asset weights drifted from their targets. All these values use lagged (1st quarter) returns on private equity, real assets and some inflation assets (commodities), accounting for about one fourth of the portfolio.

    From a table on page 62/224 of the 2015 CAFR, “Debt Securities Subject to Interest Rate Risk,” the weighted duration of Calpers’ fixed income portfolio can be estimated at about 8.6 years. (Durations are incorrectly stated as percentages rather than years in the table, but we’ll overlook that bizarrity.)

    Calpers’ July 18th press release indicates a 9.31% return on their “Barclays Long Liabilities” bond benchmark (whatever that is). Both this 9.31% return, and last year’s 8.6 year weighted duration, are more consistent with the Barclays Russell LDI 8 Year index, rather than the LDI 16 year index I used before, misled by the word “Long.” We’ll find out for sure when Calpers responds to my FOIA request.

    Incorporating this shorter duration bond index, which returned less than the ultra-long bonds, Calpers’ overall benchmark return is now re-estimated as 1.4%.

    In early August when NCREIF posts 2Q 2016 values for its property and timberland indexes, all of the public indexes will be available to finalize Calpers’ benchmark return for June 30, 2015 through June 30, 2016.

    But owing to lagged reporting from partnerships, Calpers’ actual performance for the period won’t be known until the CAFR dated Dec. 31, 2016 is posted.

    One calendar quarter lags on a fourth of the portfolio make a mess of trying to track Calpers’ portfolio against its benchmark contemporaneously. Values from the July 18th press release, weighted as described, imply that Calpers roughly met its benchmark. This may change when the lagged 2Q values become available, six long months from now.

  7. flora

    CalPERS problem isn’t just PE investments but includes sloppy record keeping, too? Yikes!
    Thanks for your continued reporting on PE and pensions.

  8. JV

    Look out for a multitude of local and state tax increase measures to pay for the CalPers return gap. It will all come out of our citizen pockets.

  9. Dewitt Darveau

    Any new Chief Actuary will certainly be on the hot seat, given the fund s poor return last year and its current actuarial assumptions. I think it is still a great opportunity.

Comments are closed.