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.