Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

Are Your Pension(s) Safe? Part 2 – Revisiting CalPERS

admin by admin
July 27, 2015
in Uncategorized
0
0
SHARES
4
VIEWS
Share on FacebookShare on Twitter

by Elliott Morss, Morss Global Finance

Introduction

In the first part of this two part series, I explained how the pension investment industry worked and why pension holders should keep an eye on them.

I pointed out:

  • “Pensions” often get sold a bill of goods by companies wanting to manage their assets.
  • The structure of the pension industry invites corruption.

I used the California Public Employees’ Retirement System (CalPERS), the second largest pension in the US, as the “poster child” for both problems. And in January 2015, its problems were highlighted when Alfred J.R. Villalobos (pictured above), a former CalPERS board member committed suicide. Villalobos faced trial on federal corruption and bribery charges for allegedly earning about $50 million as a middleman in winning CalPERS investments for private equity clients.

And sadly, Pensions and Investments (P&I) reports that CalPERS is again in the news for the wrong reasons. CalPERS reported it does not know how much it is paying private equity companies for performance. Before getting to this latest “problem”, some background on this pension investment giant is in order.

The CalPERS Investment Structure

CalPERS has investments of just over $300 billion, second only in size in the US to Federal Retirement Thrift (TSP), the Federal government workers’ pension.

Most pensions have investment committees that do all they can to avoid being held responsible for the performance of their investments. How is this done? Typically, it includes hiring a financial consultant to recommend financial institutions to make investments for the pension. This allows the pension committee to blame the consultant and the financial institutions they help pick for bad performance.

CalPERS uses this approach in a unique way. Its latest financial report indicates that in 2014, it hired 54 consulting firms at a cost of $21.7 million to help it choose investment managers. Table 1 details the costs and numbers of investment managers it hired with the consultants assisting. In total, it paid out $1.15 billion in fees to 250 investment managers who in turn decide what to invest in. Now, paying out this amount is quite reasonable when you are investing $303 billion (0.38%). However, loosing track of what large payments are being made for is another matter.

Table 1. – CalPERS Investment-Related Managers and Fees, 2014

Source: CalPERS

The Missing Private Equity Performance Fees

CalPERS has invested $32 billion (10.5% of its funds) in 264 private equity companies. As Table 1 indicates, CalPERS negotiates two fees for most managers: a flat fee in the 1% to 2% range and a performance fee ranging from 10% to 20% of gains above an agreed-upon amount. Overall in 2014, the performance fees it paid out were more than two times larger than its flat fee payments.

CalPERS reports that in 2014, it paid $440 million in fees to private equity firms. But P&I reports:

“Interviews with CalPERS officials, along with meeting videos and CAlPERS documents show officials do not know what the fund pays in carried interest [performance fees] to private equity firms….”

Another CalPERS spokesman was quoted by P&I:

“It [private equity performance fees] is not explicitly discussed or accounted for. We can’t track it today.”

WHAAT?

Apparently, having a staff of 2,727 is not enough to allow CalPERS keep track of its private equity performance fees. Another CalPERS spokesman said he believes having a smaller number of private equity firms would allow CalPERS to capture the performance data. Pathetic.

Investing $100 million in a private equity firm should be plenty to get the firm to provide data on performance fees. Arguments that performance fees are complex do not hold up. The financial industry is replete with use of “fair value” accounting. But beyond that, CalPERS is big enough to insist that any private equity company employ performance fee definitions that are readily understandable and verifiable.

The CalPERS and the Federal Retirement Thrift (TSP) Management Models Compared

It is interesting to compare CalPERS management with how the TSP funds are managed. The latter currently has a contract with BlackRock to invest its assets. Its funds are invested so as to replicate the risk and return characteristics of certain benchmark indices. For example, its “C” Fund is invested in a stock index fund replicating the Standard and Poor’s 500 (^GSPC) while its “F” fund replicates a fixed income index.

FRT has a 0.03% expense ratio[1] while the CalPERS expense ratio is 20 times higher at 0.6%. One wonders if CalPERS higher expenses are justified in terms of higher investment returns.

Investment Primer

Paul Samuelson and Burton Malkiel argued quite persuasively that most new information is discounted immediately in the stock market.[2] So stock picking is a pretty random bet, unless you can get new information before anyone else. And as an individual, I know cannot compete with the big investment houses paying millions of dollars to get new information a half a millionth of a second before anyone else. But CalPERS can pay people to get that information before anyone else. With all that it pays out, it should be able to get itself “at the front of the line” for information and outperform TSP using benchmark indices.

Performance

Has it paid off for CalPERS? Table 2 gives compounded growth rates of the S&P 500 and the overall performance of CalPERS. For the 1, 3 and 5 years, the S&P 500 has outperformed CalPERS while the latter was better for the last decade. One might say that is not appropriate to compare CalPERS overall to the S&P because it used other sector allocations than just equity. My response is that CalPERS sets its sector allocations.

Table 2. – Compound Annual Growth Rates ending June 30, 2014

Sources: Yahoo Finance and CAlPERS Reports

Looking at CAlPERS against TSP, it appears TSP outperformed CAlPERS on equity investments (all but the most recent year) while CAlPERS fixed income performance was superior.

Table 3. – CalPERS and TSP Compared

Sources: TSP and CAlPERS Reports

And how about CalPERS’ private equity performance? The performance of the PowerShares Global Listed Private Equity ETF (PSP) is compared against CalPERS in Table 4 and once again, there is no clear winner.

Table 4. – Private Equity Comparisons

Sources: Yahoo Finance and CAlPERS reports

Conclusions

The corruption, the huge amount of money spent on investment decisions, and the apparent ineptitude of CalPERS suggest that the Governor of California should hire a special prosecutor with all the power needed to “turn things around.” And the jury is still out on whether the CalPERS approach of large payments to investment managers is superior to investing in indices as TSP does.


[1] https://www.tsp.gov/investmentfunds/fundsoverview/expenseRatio.shtml

[2] Paul A Samuelson, “Proof That Properly Anticipated Prices Fluctuate Randomly“, Industrial Management Review, 6:2, 1965 (Spring) and Burton G. Malkiel, A Random Walk Down Wall Street, W.W Norton & Co., Inc., 2007.

Previous Post

Most Read Articles Last Week (Ending 25 July)

Next Post

Early Headlines: Chinese Stocks are Crashing, Al Qaeda Targets Hotel, Malaria Vaccine, TPP Final This Week, Trouble in Athens and More

Related Posts

India’s Largest Retailer Tests Digital Rupee
Economics

India’s Largest Retailer Tests Digital Rupee

by John Wanguba
February 5, 2023
Apple Forecasts Another Plunge In Revenue, Says iPhone Production Issues Over
Business

Apple Forecasts Another Plunge In Revenue, Says iPhone Production Issues Over

by John Wanguba
February 5, 2023
U.S. Weekly Jobless Claims Dropped To 9-Month Low; Productivity Gains Accelerate
Economics

U.S. Weekly Jobless Claims Dropped To 9-Month Low; Productivity Gains Accelerate

by John Wanguba
February 5, 2023
Bitcoin Flirts With $24K, How High Will It Go?
Economics

Bitcoin Flirts With $24K, How High Will It Go?

by John Wanguba
February 3, 2023
Venezuela's PDVSA Toughens Oil Prepayment Terms
Business

Venezuela’s PDVSA Toughens Oil Prepayment Terms

by John Wanguba
February 2, 2023
Next Post

Early Headlines: Chinese Stocks are Crashing, Al Qaeda Targets Hotel, Malaria Vaccine, TPP Final This Week, Trouble in Athens and More

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking banks Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe finance FTX inflation investment market analysis markets Metaverse mining NFT nonfungible tokens oil market price analysis recession regulation Russia technology Tesla the UK the US Twitter

Archives

  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • India’s Largest Retailer Tests Digital Rupee
  • Apple Forecasts Another Plunge In Revenue, Says iPhone Production Issues Over
  • U.S. Weekly Jobless Claims Dropped To 9-Month Low; Productivity Gains Accelerate

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish