(March 18, 2014) – The first investment board meeting of America’s largest pension fund since the death of CIO Joe Dear began with a tribute to the late leader and closed with a commitment to invest in the next generation.
Dear, who led the California Public Employees’ Retirement System (CalPERS) through the crucial post-financial crisis years, succumbed to prostate cancer last month. He was 62.
His colleagues, wife, children, and many friends gathered at the fund’s Sacramento headquarters on March 17 to commemorate Dear, and to carry on the work of investing $282.9 billion for his fellow public servants.
Among those present was Chris Ailman, longtime CIO of the California Teachers’ Retirement System (CalSTRS). Dear’s wife Anne Sheehan works at the sister fund as director of corporate governance.
“Anne said it best today when she read from Joe’s diary about his role at CalPERS,” Ailman told aiCIO. “He wrote, ‘This probably sounds too serious, perhaps a bit pretentious, but it is me.’ That’s quintessential Joe: He hoped it wouldn’t sound pompous or overly confident. But as his children said, his work at CalPERS was the culmination of a lifetime of public service.”
Ailman was not only Dear’s counterpart as CIO of the nation’s second-largest pension fund. They also served on the Pacific Pension Institute together and held subsequent leadership positions at the Washington State Investment Board. Ailman counts Sheenhan as a critical member of his staff, and Dear as a friend.
“I have worked with five CIOs from CalPERS, each with their own strengths and skills,” Ailman said. “In my view, Joe was the best of them all. He was a very deep thinker, a eloquent speaker, and a great administrator.”
Dear joined the pension fund in 2009, after it had lost more than a quarter of its value during the financial crisis. “It was an amazing time for him to come—we were all reeling from the crisis,” Ailman said. “CalPERS was hit by wave after wave of issues. Joe handled it all: He jumped on the situation and worked very aggressively with the staff. He was politically savvy at a time when CalPERS was under the microscope. And I know that above all else, Joe will leave behind a legacy of absolute integrity and a disciplined investment process.”
The fund’s trustees and investment staff took up that legacy following their tribute to Dear, which culminated with the CalPERS choir singing "Amazing Grace".
Most of the meeting’s open session was devoted to progress updates for initiatives on investment office diversity, public infrastructure investing, responsible contracting, and, particularly, emerging managers.
The organization has the greatest exposure to small and early-stage asset managers of any fund in its peer group, Callan Associates’ Ron Peyton reported at the meeting. The consultancy had undertaken a survey of similar institutions at CalPERS’ behest, gathering data on seven other large funds.
The findings bore out the Californian giant’s stated commitment to developing talent: It had the largest dollar allocation to emerging private equity ($6.2 billion) and hedge fund managers ($819 million) of any institution surveyed. Of its externally managed assets, CalPERS had 19% with small private equity firms, 16% with boutique hedge funds, and 18% allocated to emerging public equities managers. Its peers averaged 12%, 6%, and 6% for each asset class, respectively.
Still, as of June 30, 2013, the retirement system’s 171 emerging private equity managers had underperformed the portfolio’s established managers by 168 basis points since inception. The $30.6 billion program as whole returned 14.5% over the last three years. But boutiques have made up a significant number of the best performers industry-wide in almost any given vintage year, according to Cambridge Associates data presented at the meeting.
“Why does CalPERS invest in emerging private equity managers? Access to the full landscape of investment opportunities is one reason,” said consultant Anita Ng. “The opportunity to develop relationships with the next generation of strong performing funds is another reason. Getting in early with an emerging manager can secure access and favorable terms”—neither of which might be available down the road, she pointed out.
The board liked what it heard. As recommended by investment staff, trustees voted to allocate $200 million to a private equity funds-of-funds focused on emerging managers with high potential. Interim CIO Ted Eliopoulos called the move “a reflection of CalPERS’ ongoing commitment to emerging and diverse managers.”
Dear instituted that commitment with a five-year emerging manager plan adopted in 2012. Just months into the initiative, accusations that CalPERS was reneging on its policy arose during a state senate hearing. The CIO met the claims head-on in a letter to the chairman of the hearing. Dear noted that he was “troubled by testimony that questioned our commitment and intentions," and emphasized the fund’s "unwavering continued commitment to emerging and diverse investment manager strategies."
Dear’s wife recalled during the March 17 tribute, “Joe used to joke that he came to CalPERS looking for a challenge, and succeeded beyond his wildest expectations.”
An open memorial for Dear has been scheduled for 2pm on April 5 at the Evergreen State College Library in Olympia, Washington.