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:
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.
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.
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.