Lessons from CALPERS: Taking the Long View
CALPERS is engaged in a bit of soul-searching, as its board and staff hone in on exactly what they believe should be the guiding principles of managing the pension plan in the next ten years. The Investment Committee just released the results of an internal survey. The people running CALPERS appear to be a sensible group. They are skeptical about their ability to add value in relatively liquid markets using external money managers. They have healthy doubts about the efficacy of using hedge funds. They recognize that private equity can generate returns in excess of the public markets. However, they also realize that at CALPERS’s huge scale and because of the fee structure, it is difficult to achieve the appropriate premium over stocks. They still believe in real estate as a long-term asset despite the poor performance of the asset class over the last decade.
I decided to do a different kind of survey of CALPERS’s investments. I wanted to compare the 10-year performance today versus the 10-year performance roughly ten-years ago, and also look at how the asset allocation has changed over time. The idea is to see if there are any lessons in the data.
The Table set out below summarizes CALPERS’s experience. Overall the pension plan returned 9.3% for the period ended June 30, 2002, and 8.0% for the period ended February 28, 2013. Back in 2002, CALPERS managed a fairly conventional portfolio of stocks, bonds, real estate, and private equity. Over the prior ten-year period, each of the asset classes did just about what you’d expect. Private equity returned 2.1% over stocks, and real estate earned about 0.8% less than equities. Return and risk were appropriately paired.
CALPERS Asset Allocation and Ten-Year Returns
Switching to the most recent time period, we see two major developments. First, CALPERS entered a series of new areas of investment (the new strategies shown in the table). Roughly 8% of the portfolio was shifted into commodities, inflation-linked bonds, and hedge funds (absolute return strategies), etc., and another 8% was shifted into private equity. Since the new strategies don’t yet have a ten-year record, we don’t know yet know how they’ll perform. However, the three and five-year data (not shown) are a mixed bag. Infrastructure is off to a good start, but commodities and hedge funds haven’t done much for the plan.
Second, with the important exception of real estate, the conventional asset classes did their job. Stocks and private equity drove returns, with private equity returning 2.2% over public equities. Clearly, the real estate debacle hit CALPERS very hard. I’d guess that their particularly large exposure to California, coupled with higher exposure to leveraged real estate deals, hurt their returns.
Some of the new strategies may, in time, prove valuable. However, the long-term data suggests that CALPERS and most investors are still best served in the traditional asset classes. For better or worse, it’s stocks and bonds with a dollop of real estate that drive returns and risk. All the new strategies and forays may add some value, but in the end their chief contribution seems to be in driving up fees and complexity.