CalPERS has long been known as a hands-on, activist-oriented pension fund, but its recently minted list of 10 investment beliefs seems to have stirred up some hostility among financial professionals.
Its spokesman calls much of the reaction “uninformed chatter.” After a protracted process, the largest public pension fund in the U.S. said it formally adopted its new beliefs to “provide a basis for strategic management of the investment portfolio, inform organizational priorities and ensure alignment between the Investment Office and CalPERS staff.”
Sounds harmless, right?
Not exactly. The news was greeted by plenty of criticism and even a bit of scorn, as various professionals in the financial field took CalPERS to task for adopting beliefs that were too vague and questioned the very process of determining those beliefs. Critics also said the pension fund was following a course that would move its investments toward an all-passive portfolio and thereby casting financial analysis to the wind.
Keith Paul Bishop, in a blog post on the California Corporate & Securities Law website, was among those with raised eyebrows.
"At a purely analytical level, these beliefs are so general and open-ended that they could be interpreted, like Polycrates’ dream, in a variety of ways," Bishop, a partner in Allen Matkins' corporate and securities practice, wrote.
Matt Levine, a Bloomberg View financial columnist, went so far as to suggest that if CalPERS intended to stop using external active managers (and stop paying their fees), "it’s about the death of public equity markets as a system for allocating capital."
And last but not least, Robert Boslego, managing director of Boslego Risk Services, a consulting firm in Santa Barbara, Calif., blogged that CalPERS' investment principles "have the circular look of a policymakers’ version of a letter of intent about determining an intent that determines policy guidelines."
He also criticized the makeup of the board that came up with the beliefs, referring to it as a "kangaroo committee" because its members are not necessarily financial experts; he singled out one who was "a glazing specialist (as in pottery or glass) in a California school district and questioned why he should have "an apparently equal voice on the dictates of stewardship of $270 billion of assets."
Criticisms aside, the fund’s 10 investment beliefs do, in fact, read more like a series of principles to guide socially responsible investing, including references to such things as “human capital” and directives to “consider the impact of (CalPERS’) actions on future generations” and create “sustainable value.”
In part, that means investments it makes must now consider climate change and natural resource availability, factors that emerge slowly over long time periods, but “could have a material impact on company or portfolio returns.”
The full set of beliefs can be viewed here in detail, but the main principles are as follows:
1. Liabilities must influence the asset structure.
2. A long-time investment horizon is a responsibility and an advantage.
3. CalPERS investment decisions may reflect wider stakeholder views, provided they are consistent with its fiduciary duty to members and beneficiaries.
4. Long-term value creation requires effective management of three forms of capital: financial, physical and human.
5. CalPERS must articulate its investment goals and performance measures and ensure clear accountability for their execution.
6. Strategic asset allocation is the dominant determinant of portfolio risk and return.
7. CalPERS will take risk only where we have a strong belief we will be rewarded for it.
8. Costs matter and need to be effectively managed.
9. Risk to CalPERS is multi-faceted and not fully captured through measures such as volatility or tracking error.
10. Strong processes and teamwork and deep resources are needed to achieve CalPERS goals and objectives.
Offering one of the few in-depth responses to the skeptics, Joe DeAnda, a CalPERS spokesman, told BenefitsPro.com that the principals are “intended … as (a) foundation for everything to do with our investments,” but are not some radical, nebulous plan to override the way business is normally done.
The process to develop the list itself, he said, was not a superficial one imposed by an outside consultant, as one critic suggested, but a lengthy one, driven by CalPERS itself, that sought buy-in from a wide range of stakeholders — not just the people in the CalPERS offices, but the future beneficiaries of the plans and retirees as well.
The idea, he said, was to provide “a continuity of thinking and a philosophy as senior investment staff come on board and leave” and board members, too, change as political appointments or elected offices change. “Having these beliefs will … keep a level of continuity, no matter what personnel changes may happen.”
In addition, said DeAnda, “There (are) no specific deliverables that come out of the adoption of the beliefs; nothing changes about the portfolio, or our operations.”
These principles, which were given preliminary approval in September and should be formally adopted at the October meeting of CalPERS’ investment committee, also were not designed to convert the fund’s entire $265 billion-plus assets to passive management, as some in the industry have suggested.
On that point, DeAnda noted passive management was something CalPERS was already moving toward. “Really the only place where this is a conversation is with the public equities portfolio,” he said, pointing out that that portfolio, which is 50 percent of the fund, is already two-thirds passively managed. “We said we’ll use index tracking strategies where we’re not firmly convinced that active management can add value. (And that’s a belief that’s) already been held.”
Neither are these principals intended to supplant the data-driven process that governs the choice of investments, he said. The principles don’t look at “risk and … performance data; those are things that go on in an ongoing process … that any pension fund, let alone the largest, is doing. (The beliefs aren’t) part of the investment process, and weren’t intended to be.” Instead they were intended to be “a set of principals, philosophical values, in a statement of beliefs,” DeAnda said.
In that sense, CalPERS was breaking ground in coming up with its investment beliefs.
“Very few pension funds — a couple of European funds, and in the U.S. the only other one is, I think, Washington State — may have them, too,” DeAnda said. “But (you’ll be) seeing more and more funds do that, because it’s important to guide the investment office. That’s more groundbreaking, if you will.
“It’s (now) clear where we stand as a fund — what our priorities are and what’s important to us — and that will be set in place.
“There will be no question in the years ahead about what we believe on the investment side.”
And anyone hoping to do business with CalPERS will, no doubt, want to be sure they share in those beliefs.