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.”
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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.