Why Is CalSTRS Continuing to Out-Perform CalPERS?

We had a busy time on the West Coast last week, which included a visit to CalPERS’ offsite in Concord. More on that in due course.

In the meantime, let’s look at what techies would call an anomaly: that CalPERS consistently lags its Sacramento sister, CalSTRS, in investment performance. CalSTRS, at $223 billion in assets, manages the pensions of state teachers. CalPERS, which stands at roughly $350 billion in holdings, should have an advantage over CalSTRS by virtue of its larger size and reputation, which should enable CalPERS to attract and retain higher-caliber investment professionals, as well as occasionally get better terms by virtue of making large commitments and having one of the highest-profile names.

Yet here are the results:

Fiscal year 2017-2018: CalSTRS 9.0% versus CalPERS 8.6%

Fiscal year 2016-2017: CalSTRS 13.4% versus CalPERS 11.2%

Ten year average for the fiscal year ended 2016-2017: CalSTRS 6.81% versus CalPERS 6.45%

In addition, CalPERS long-standing head of fixed income, Curtis Ishii, was renown in the investment industry for regularly delivering top 10% performance, to the degree that he was regularly recruited by fund managers. But CalPERS was fortunate in that Ishii apparently had what few possess: enough. His retirement this year is likely to increase the performance gap between CalPERS and its peers.

So why is CalPERS’ performance falling short? Long-standing private equity columnist Dan Primack, who now reports for Axios, attributed it to CalPERS’ habit of jumping on fads late in the game, like divesting from tobacco stocks at the bottom, right before the Federal-state settlement. Primack’s take on CalPERS’ proposed private equity scheme hasbroader implications:

Over the years, CalPERS management has treated its private equity strategy like a toddler treats a Netflix queue. Let’s try this. No, let’s try that. I don’t even know what that is, but it sure looks cool….

Late-stage and Buffett-style strategies are the two hottest trends right now in private equity, which likely means it’s a questionable time to launch new programs that won’t be ready until the first half of 2019. In fact, CalPERS has a distressing private equity history of diving in near market tops and exiting near market bottoms (see: Capital, Venture).

Similarly, as we’ve noted, CalPERS’ public equity performance has fallen short in recent years because the fund made a big anti-dollar bet in the form of putting about half of its equity portfolio in foreign stock during what wound up being a strong dollar period. Oops.

Our view has long been that one of the reasons that CalSTRS does better is that it has a vastly and visibly more capable board. The board members have clearly read the staff’s materials in advance and have a good understanding of investment principles. They push back on the staff and the outside consultants.

By contrast, as we’ve discussed at length, CalPERS has a diseased culture of casual lying and anti-accountability. CEO Marcie Frost has actively enabled it by telling whoppers, like her eye-popping defense of resume fabrications by later-ousted Chief Financial Officer Charles Asubonten, or ducking out of a panel discussion with pension critic John Moorlach at the very last minute. The OC Weekly announced, meaning effectively reconfirmed, her participation in the July `12 event in a July 11 story.

And what was Frost’s excuse for standing up Moorlach and the event hosts? Insiders say Frost claimed she had jury duty. First, you don’t get put on jury duty at the last minute. Second, Frost somehow was able join in the CalPERS offsite on July 16, a mere two business days later. Perhaps Sacramento is different, but she presumably hadn’t been called as the date of the article, and separately had she known in advance, it seems implausible that she’d have not have deferred to a week after, rather than right before, board meetings. In other words, it looks like she set up an option to get out that she exercised, and that anyone who understood her job would see as not plausible.

Frost has also fetishized the use of the management baffle-speak “team members” and attributing decisions and action to various teams. This practice undermines accountability and transparency.

With leadership like this, there’s no reason to expect things to get better at CalPERS. And the staff’s dogged pursuit of a corrupt-looking private equity scheme for which it can’t even muster a plausible rationale says there is good reason to expect things to get worse.