Calpers doubles down

What do you do when you've had a run of bad luck? Managers of the giant California pension fund, once valued at almost a quarter of a trillion dollars, apparently think increasing your bet is the appropriate response, as detailed in this report from the New York Times.

Big as California’s budget woes are today, so are the problems lurking in its biggest pension fund.

The fund, known as Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall. Meanwhile, local governments in the state are pleading poverty and saying they cannot make the contributions that would be needed to shore it up.

Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.

Since their fiscal year begins and ends at mid-year, it's difficult to compare the performance of the Calpers fund to other investments over the last eighteen months, but the 23 percent loss from mid-2008 to mid-2009 compares favorably with other pension funds.

Their approach going forward, however, runs counter to the more conservative approach recently adopted by many other institutional investors.

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.
That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns.

“Three percent on a portfolio as large as ours makes a material difference,” he said.

If he can inch Calpers’s investment performance up, many problems will disappear. If not, Calpers may end up in an even bigger financial squeeze than it is today.

This has a great potential to end very badly...