the System

  • 26 Mar 2013 at 3:07 PM

Don’t Do It, CalPERS!

What is CalPERS’s job? There’s actually an answer: it’s to “Provide responsible and efficient stewardship of the System to deliver promised retirement and health benefits, while promoting wellness and retirement security for members and beneficiaries.” I suppose “the System” is defined somewhere, and blah blah blah health benefits and wellness and beneficiaries, but I prefer to stop at the capitalized abstraction: CalPERS provides responsible and efficient stewardship of the System.

“Responsible” and “efficient” can conflict, though:

The second-largest pension fund in the United States is considering a move to an all-passive portfolio while at the same time, the largest brokerage firms are falling over themselves to push passively managed exchange-traded funds. The California Public Employees’ Retirement System’s investment committee started a review of its investment beliefs last week, with the main focus on its active managers ….

CalPERS oversees about $255 billion in assets, more than half of which already is invested in passive strategies. … “CalPERS investment consultant Allan Emkin told the investment committee that at any given time, around a quarter of external managers will be outperforming their benchmarks, but he said the question is whether those managers that are doing well are canceled out by other managers that are underperforming.”

So: financial markets exist to allocate capital to its most productive uses.1 One use of capital that may not be all that productive is allocating capital, so it’s understandable that rich sophisticated capital-allocators like CalPERS would allocate less capital to the business of allocating capital. Why spend so much money on external active manager fees when they turn out not to be that good at active management? Just index, right? Read more »