CalPERS Loses around 4% in Last Week’s Stock Dive

The California Public Employees’ Retirement System (CalPERS) lost at least $15 billion last week due to falling stock prices as coronavirus fears spooked investors.

A tracker on the pension fund’s website said the fund had $385.15 billion in assets as of February 27. The figure is down roughly $15 billion, or about 4%, from more than $400 billion the week before.

The drop comes after the S&P 500 tumbled last week by around 11.5%. The fall was the worst week for the index since the great financial crisis. In October 2008, the S&P 500 dropped by around 18%.

The losses aren’t just affecting CalPERS, the largest U.S. pension fund by assets, but other pensions funds and institutional investors, both in the U.S. and globally. CalPERS has a more robust disclosures than most funds, posting overall assets with only a several day delay.

Other institutional investors have yet to report their losses but officials of the HK$969.5 billion ($124.6 billion) Hong Kong Mandatory Provident Fund (MPF) have warned that the coronavirus outbreak will hurt its returns in 2020.

The ultimate long-term effects on CalPERS and other institutional investors is hard to immediately determine. If stock markets recover quickly from last week’s global drops, it could ultimately have little impact.

However, if market declines continue and have prolonged effect on investment returns, it could cause serious problems.

CalPERS spokesman Wayne Davis in a statement to CIO cautioned against drawing inferences on the pension plan’s overall health based on last week’s market drops.

“CalPERS is a long-term investor,” he said. “Of course, we monitor events, but our investment horizon is over years, not weeks or months.”

CalPERS and other pension plans still have not recovered from the great financial crisis when asset drops of 25% or more were the norm. CalPERS was 86.9% funded as of June 30, 2008. The following year overall funding was in the low 60% range.

CalPERS assets were at $260 billion in October 2007 before the financial crisis started but dropped to as low as $165 billion as of February 2009.

Eleven years, later, in early February 2020, CalPERS assets were more than $400 billion, but the funding ratio was at only around 71%, way below the 86.9% in 2008. A combination of factor including mixed returns, longevity increases for CalPERS retirees and an increase in retirees collecting benefits compared to active workers, prevented CalPERS from making a full recovery.

CalPERS serves both state, municipal and school workers in communities across California. Municipalities have been particularly hard hit and have faced increases in payments to CalPERS of more than 20% in recent years.

A prolonged downturn would mean even more increases, something that some municipalities say could force them into bankruptcy or require them to layoff workers and cut city services.

CalPERS has around $200 billion in equities, which make up around 50% of its overall portfolio. CalPERS Chief Investment Officer Ben Meng has expressed concern at meetings over the last year that CalPERS portfolio was very dependent on strong equity returns.

Meng has made changes in the equity portfolio that he feels will reduce risk factors, but the pension plan still has one of the largest equity portfolios in the world.

“We have been preparing for a downturn in the market for several years, concentrating on managing liquidity and implementing a factor-weighted equities portfolio to diversify our portfolio,” CalPERS spokesman Davis told CIO.

Around $50 billion of CalPERS equity portfolio is factor-based equity strategies, managed by CalPERS in-house. The strategies use various factors such a stock’s past performance to overweight the stock in CalPERS portfolio.

CalPERS has not released any figures that show how the factor-based investments did last week compared to the more than $100 billion CalPERS has invested in more traditional equity index strategies.

CalPERS in a major investment move in the fall of 2019 almost completely terminated its active equity program, managed by external managers.

It fired most managers slashing their total allocation to $5.5 billion from $33.6 billion.

The move came after CalPERS investment officials determined that most of their active equity managers were underperforming CalPERS index strategies.

Only three of 17 external equity managers were spared in the reduction, shows a memo by CalPERS Chief Executive Officer Marcie Frost.

The October 21 memo to CalPERS board members also reveals that CalPERS Chief Investment Officer Meng has restructured the pension plan’s emerging manager program, reducing the allocation to $500 million from $3.6 billion. That portfolio was also actively managed.