CalPERS Comes Dead Last of 34 Public Pension Returns Despite Having Biggest, Best Paid Investment Office

Despite having the most heavily staffed and luxuriously paid investment office of any public pension fund, CalPERS scored the worst investment returns of any of 34 funds tracked by Pensions & Investments.

As you can see at the Pensions & Investments site, CalPERS return for fiscal year 2020-2021 was 21.3%. The next lowest was tiny Kern County, more than two and a half points higher, at 23.9%. CalPERS’ Sacramento sister CalSTRS delivered 27.8%. The stars were Texas County, at 33.7&. New York Common, at 33.6%. San Bernardino County, at 33.3%, Oklahoma Teachers, at 33%, and Oklahoma Firefighters at 31.8%. Mississippi PERS came it at 32.7%, but that was gross of fees. Nevertheless, five funds earned a full 10% in investment returns more than CalPERS, and the pension fund arguably the most similar to CalPERS in terms of scale did more that 6% better.

That extreme laggard result also fell short of CalPERS benchmark of 21.7%. Recall that investment expert Richard Ennis explained at length that public pension funds and their consultants devise their own benchmarks, and they not surprisingly wind up being unduly forgiving

An earlier paper by Ennis found that even though nearly all public pension funds generated negative alpha, as in they actively destroyed value, CalPERS was one of the worst, coming in at number 43 out of 46, with a stunning negative alpha of 2.4%. From a 2020 post:

Ennis’ conclusions are damning. Both the pension funds and the endowments generated negative alpha, meaning their investment programs destroyed value compared to purely passive investing.

Educational endowments did even worse than public pension funds due to their higher commitment level to “alternative” investments like private equity and real estate. Ennis explains that these types of investments merely resulted in “overdiversification.” Since 2009, they have become so highly correlated with stock and bond markets that they have not added value to investment portfolios. From a 2020 post:

Alternative investments ceased to be diversifiers in the 2000s and have become a significant drag on institutional fund performance. Public pension funds underperformed passive investment by 1.0% a year over a recent decade…

CalPERS is a standout in the “negative value added” category, ranking 43 out of 46, with a “negative alpha” of 2.36%. This is a particularly appalling scoring, since CalPERS has far and away the largest and best paid investment office of any US public pension fund. But is this outcome partly result of CalPERS paying its investment team for merely showing up? The investment office staff perversely receives performance bonuses for merely almost hitting their benchmarks, which means achieving what CalPERS has defined as “market” performance. As we’ll discuss soon, Ennis describes how those benchmarks are self-serving and more favorable than using simple, broad stock and bond market proxies.

You will never hear any honest account from CalPERS about how dreadful its performance was. The giant fund is trying to present its back of the pack performance as some sort of actual, as opposed to perverse accomplishment, by pointing to the fact that it finally beat its 7% performance target. So too did virtually everyone in America who didn’t put their money in a mattress.

The failure to admit that CalPERS is incompetent at managing money means nothing will be done to improve this sorry situation.

The best thing CalPERS could do would be to fire virtually everyone in its investment office except for, say, those who run in-house index funds, slimmed down private equity and real estate teams to manage what would become legacy portfolios, and a few people at most to work on asset allocation. The rest of the money would go to a simple allocation strategy invested in Vanguard or equivalent index funds. A project sponsored by Stanford to look at alternative approaches to managing public pension funds found that a simple five-fund Vanguard strategy beat the results of 90% of public pensions funds. That finding continues to hold.

The worst thing that CalPERS could do is what is appears to be planning to do, which is not hire anyone and let internal mediocrity Dan Bienvenue take the reins.

It’s now more than a year since Chief Investment Officer Ben Meng resigned in disgrace. CalPERS has tried to maintain that it’s been diligently looking for a new Chief Investment Officer but despite offering a juicy package, no one suitable has shown up. That’s narrowly true only because CalPERS has a very peculiar definition of what “suitable” amounts to.

We know from candidates, as opposed to from CalPERS sources, that not just one but two superbly qualified candidates applied for the job. Both have been CIOs for years at very large funds. Miraculously, both also worked for public pension funds and thus are under few or no delusions at to what they are like. Both have stellar reputations.

One was greeted with extreme hostility in his interview. Insiders told us that one individual who has influence over the final decision was (and I gather is) set against a white man getting hired. That likely accounts for the second well/overqualified candidate going nowhere.

Now we much prefer having CalPERS go the “radical passive investment” strategy. But if they insist on running a conventional investment office, they desperately need to rebuild staff. Ben Meng made a point of driving out anyone with the expertise and stomach to question what he was doing, like dumping a tail risk hedge that Meng made clear he didn’t understand. So any new Chief Investment Officer would have to be perceived as sufficiently skilled as to be able to attract and manage other capable individuals.1

By contrast, Bienvenue succeeded in expanding the internal active management of equities as well as maneuvering the hiring of individuals who would be loyal to him. For nearly the entire time I have been following CalPERS, the big reason for the funds’ lagging performance has been global equities, and Bienvenue has a, if not the, leading role in that, including a huge emerging markets bet in 2017 that cost CalPERS billions. As another recently departed CalPERS investment office staffer reported:

The best story I heard from the investment office was when Ben [Meng] addressed them at the quarterly all staff meeting. He stood up in front of the whole office pointed his finger at them and said you should all be lucky to have a job. If we were in the private sector you would all be fired because of how bad the performance numbers are. Stand him right next to him was Dan, with a smile on his face. He knew he was protected. He was the cause of all of it.

So CalPERS seems determined to go from bad to worse. The board has been unwilling to ask tough questions about any of its many recent fiascoes: the Marcie Frost educational history fabrication, the nonsensical, ever-changing private equity gimmickry, the nearly $600 billion writedown of real estate, how Ben Meng was allowed to stay invested in stocks that would clearly cause a conflict of interest problem, and most important of all, why the returns continue to be so poor relative to the investment office’s lavish staffing and pay? The extreme passivity of nearly all of the board is enough to validate critic’s view that the mediocre returns help hide CalPERS role as a way of laundering political donations through investment manager fees, a more refined version of the pay to play practices that landed former CEO Fred Buenrostro in Federal prison.2

In other words, CalPERS incompetence is so egregious is that it’s becoming less and less crazy with every passing day to wonder if the inaction by the governor, the State Treasurer and State Controller are no accident, that CalPERS is understood to be a means to other ends. I’ve been resistant to notions like that, even when they come from savvy CalPERS beneficiaries. However, I’m having more and more trouble explaining CalPERS’ and the state’s lack of concern about ever-rising evidence of institutional failure.

In the meantime, beneficiaries need to wake up and demand better. The lack of any serious pushback is a major enabler of the putative leadership of CalPERS running it into the ground.

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1 Over the years, we’ve gotten e-mails from CalPERS investment staffers who’ve come to Sacramento and very much regretted the move. One of this ilk, who like many of our correspondents, has managed to leave:

As an educated top tier MBA grad and former Wall Street professional, I have become so disenfranchised with implementing positive change internally at the org that the only thing seemingly resulting in an impact is you and your blog. I don’t know what motivates you but still want to say thank you so much from people like myself who feel useless to make any dents inside the prison that is CalPERS.

2 The place most likely for this to take place, if it is indeed taking place, would be through real estate investments.

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15 comments

  1. Tom Stone

    Real Estate is indeed a fine way to launder Money, there are so many mechanisms for obscuring ownership, “Valuing” property in beneficial ways ,and channeling $ to “Managers” and
    “Vendors” that you might think they were deliberately designed that way…

    1. CalPERS keeps the Sac politicos greased

      Good point, if you add real estate and private equity, let’s approximate CalPERS allocation of $100 billion to outside general partners, who average per some estimates 5% annual fee, which works out to $5 billion in fees paid every year, which leaves plenty even after paying off the handlers, grifters, and politicos, who will in return support CalPERS staff and board no matter how horrible their performance

  2. Andy Silton

    North Carolina did even worse — 19.1%. P&I didn’t report on it because State Treasurer Dale Folwell did not issue a press release. He had to report to the Governor and the General Assembly so the numbers were published. Unlike CALPERS, the staff did its job. Most of the asset classes beat their benchmarks, but the State Treasurer, a sole fiduciary, failed to follow his own asset allocation and held over 10% cash. http://meditationonmoneymanagement.blogspot.com/2021/08/while-investment-advisory-committee.html

  3. Bob

    “In other words, CalPERS incompetence is so egregious is that it’s becoming less and less crazy with every passing day to wonder if the inaction by the governor, the State Treasurer and State Controller are no accident, that CalPERS is understood to be a means to other ends. I’ve been resistant to notions like that, even when they come from savvy CalPERS beneficiaries. However, I’m having more and more trouble explaining CalPERS’ and the state’s lack of concern about ever-rising evidence of institutional failure.”

    CalPERS’ management style is no accident. Why else would management hire Ms. Frost ? Why else would Mr. Meng’s departure be handled so quietly ?

    1. calpers

      CalPERS is understood to be a means to other ends.”

      Bingo, and what may those ends be?
      Use calpers assets to pay billions in fees to companies who donate large amounts to Sac politicians, and to push the agenda of the same politicians on ESG and on diversity inclusion and equity (DIE)

      if you skim calpers investment committee agenda or the meeting minutes, you’ll see a lot about ESG and DIE, but nearly nothing about how to improve their pathetic returns

      it all starts to make a bit of sense when you classify calpers as a political, not an investment, organization

  4. The Rev Kev

    When I am wrong I will admit it. Reluctantly, but I will admit it. And so it is with CalPERS. Why this revelation? It is because after reading the “Is Higher Education a Pyramid Scheme?” post that I finally came to realize what CalPERS is. All these years slinging off at them I had naively assumed it to be a corrupt, dodgy pension scheme. Well maybe I was right about corrupt and dodgy part but I finally came to understand what CalPERS actually is. It’s a PMC employment program! It’s just like how all the PMC admin staff in a university sucks up all the wealth and benefits for themselves while trashing their university, impoverishing their staff and leaving their students in a lifetime of debt.

    As long as you are a paid up member of the PMC, there will be a place for you. Frost shows that you do not actually need to be educated to get a gig there. Charles Asubonten proved that you could just download a resume off the internet and claim it as your own after filing of the serial numbers. Ben Meng proved you did not need to even know how to do your job and could be forgiven losing billions of dollars. And Theresa Taylor has now just proven that you can be a nasty piece of work and still get to keep your job. I am here to say that you could fire half the CalPERS Board and you know what difference it would make? None I bet. And the Staff that want to bypass the Board and run CalPERS are just more PMCs that have far too much time on their hands. You could probably fire two thirds of them and have no loss.

    So why are they there? As I said, it’s a PMC employment program. That is why they have so much protection from Sacramento. Because the State government is saturated with PMCs as well and they do all help each other out and give mutual protection. It’s a class thing. It is like the Airplane Game where the Crew are the CalPERS Board and Staff who are trying to bilk the Passengers/pensioners to help themselves get a big payout. And eventually when the CalPERS plane goes down in flames, it will be the Passengers/Pensioners who will be going down with it while the Crew would have long parachuted their way out.

    1. ChrisPacific

      Index funds don’t exactly take a lot of management. If you go that route it becomes very hard to justify keeping a large and well-paid investment office around.

      It would also mean officially giving up on any beat-the-market forecasts (by definition index funds don’t beat the market, they track it exactly) and accepting whatever the funding implications of that might be. It would nonetheless be vastly preferable to pretending that current performance is a temporary (decades-long) embarrassment thanks to Mean Old Mr. Market, and returns will bounce back any day now, honest! A board that was willing to reject dog-ate-my-homework level excuses like that would be a good start.

      1. TMoney

        But it would be easy to justify bonuses by tying your benchmark to the average (active) pension fund peer – that you would outperform.

    2. HotFlash

      Because the State government is saturated with PMCs as well and they do all help each other out and give mutual protection. It’s a class thing.

      Solidarity!

  5. TheodoreBallgamePhD

    They also have by far the most difficult mandate among public pensions. Comparing a sub $10B pension plan (as I believe Oklahoma Firefighters is) to a wildly underfunded, $450B plan like CalPERS is, at best, misguided.

    1. Yves Smith Post author

      Please do not make unwarranted excuses. Pensions & Investments made this comparison, and Richard Ennis, (founder of KruppEnnis and a top quant expert and investor) was shocked at CalPERS underperformance. As he said via e-mail:

      My forecast of the average FY 2021 return for June 30 public funds is in the vicinity of 28-30%. My forecast for CalPERS was several percentage points higher yet because of its particular characteristics. The return of 21.3% is one of the largest annual shortfalls I have seen.

      CalPERS is not wildly underfunded. It was at 70% and is now at 80%.

      CalSTRS is another very large fund, is more underfunded. and came up with much better performance.

      CalPERS also (supposedly) has much better staffing and is better able to hire top consultants. At its scale, paying for expertise is proportionally cheaper than for a small fund.

      Moreover, CalPERS is not swinging for the fences. Ben Meng implemented factor investing in a way that reduced the risk of the equity portfolio and that was a big reason for the poor performance.

  6. Basil Pesto

    One was greeted with extreme hostility in his interview. Insiders told us that one individual who has influence over the final decision was (and I gather is) set against a white man getting hired.

    lol. Stay woke, CalPERS!

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