CalPERS Global Equity Program Gets a ‘B’

It was a much better grade than the CalPERS Investment Office, which got a ‘D’ because of turnover in senior management.

The California Public Employees’ Retirement System’s $178.6 billion global equity program received an overall grade of B from the system’s general consultant, but the overall CalPERS investment organization was given a much lower D rating.

Wilshire Consulting cited a strong team-based culture among investment officers managing the global equity portfolio for its B rating but named turnover among CalPERS top investment officials for its overall D rating.

In a November 13 report, Wilshire cited the departure of Chief Investment Officer Ted Eliopoulos and turnover in the chief operating investment officer (COIO) position for its low rating.

In September, Wilshire had also issued the investment office the same overall D rating, citing the same senior management departures, as part of its evaluation of CalPERS’s $84.7 billion fixed-income program. At that time, Wilshire also gave the fixed income program an overall B rating.

Today is Eliopoulos’ last day. CalPERS’s new CIO Yu Ben Meng won’t start until sometime in January even though he was appointed to the position in late September.

The delay is because of a non-compete agreement put in place by the Chinese government. Meng had been a key investment officer in China, managing more than $1 trillion of China’s foreign currency reserves.

CalPERS was also without a permanent person in the number two spot in the investment officer, the COIO, for five months after the early January 2018 departure of Wylie Tollette. Elisabeth Bourqui, the head of pension assets and liabilities management at ABB Group in Switzerland, was named C in May.

 Wilshire consultant Steve Foresti told investment committee members at the Nov. 13 meeting that the CalPERS investment office’s overall rating should improve “as we move forward, and things stabilize and get integrated.”

He said the drop to D from C in the investment office rating between 2018 and 2017, was “purely because of that level of turnover at the CIO level and COIO level.”

As to the previous 2017 C rating for the investment office, Foresti told the investment committee that staff turnover, not only among CalPERS senior management, but among investment staff in the global equity program, was an issue. He said CalPERS is unable to offer the incentive structure and asset management ownership that can be offered at private asset managers. Some of the same factors were also cited in the Nov. 13 Wilshire report that was presented to the investment committee.

“CalPERS  faces some unique organizational risks that for-profit enterprises have greater flexibility in managing,” the report said.  “There is a lack of long-term ‘ownership’ opportunities such as direct ownership, phantom stock, and other incentive-based compensation packages.”

CalPERS portfolio officers do get bonuses but the yearly pay of several hundred thousand dollars at most pales to the potential millions of dollars in compensation investment officials can earn at asset managers.  

Wilshire noted in the Nov. 13 report: “While the Global Equity team continues to look for outstanding candidates for new and open positions, compensation bands constrain its ability to attract candidates especially with competition from both local asset management and asset owner organizations. There are currently open positions at the Investment Director (ID), Investment Officer (IO), and Associate Investment Manager (AIM) levels, which play an important role in supporting the senior team and will be crucial in maintaining the quality of personnel over the long-term.”

The Wilshire review of the global equities program also looked at the underperformance of the global equity portfolio in the latest 12-month fiscal year ended June 30. Despite strong absolute performance—a net return of 11.5%—Wilshire noted that the global equity portfolio underperformed its custom benchmark by 0.4%.

Wilshire said the program’s recent underperformance, “appears to be largely the result of its intentional tilt towards defensive positioning rather than from any deterioration in investment approach or process.”

Wilshire did recommend continual monitoring of the global equity team’s investment approach.

CalPERS has an overall investment portfolio of $361.1 billion and is the largest pension plan in the US.

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