New risk system, staff buildup hoped to provide buffer
Officials at the $226.5 billion California Public Employees' Retirement System, Sacramento, are using a new risk management system and attempting to beef up investment staffing as they continue efforts to better protect the pension fund from another financial meltdown.
The new risk system, BarraOne, allows CalPERS to compare holdings of hundreds of the pension fund's private equity partners with CalPERS' own public equity portfolio to see, for example, if there is overconcentration in a particular sector, said Janine Guillot, CalPERS chief operating investment officer.
“Let's say we ended up with a large concentration in some consumer sector in private equity,” she said. “We could choose to alter the mix of our public equity portfolio to bring down that concentration if we wanted to, but historically we wouldn't have even known that.”
Ms. Guillot said the new analysis between and among asset classes is essential given CalPERS' huge exposures. As of Jan. 30, the pension fund had $113.6 billion in public equities. Private equity totaled $33.9 billion and real estate assets totaled $19.2 billion as of Oct. 31, the latest period for which data were available.
Ms. Guillot said the new system also will enable CalPERS to compare the portfolio risk of its real estate holdings to the entire CalPERS portfolio. Previously, she said, CalPERS could only analyze real estate risk in isolation.
The value of CalPERS' investment portfolio dropped around 25% in the fiscal year that ended June 30, 2009, convincing the CalPERS board that the system needed to enhance its risk capabilities.
Changes over the past two years have included creating a risk management office, cutting fees of external investment managers and allowing investment teams to break out of their silos to collaborate with each other to better seize investment opportunities, said Ms. Guillot.
“We learned from the financial crisis that we needed a sharper focus on how our investments were reacting to what's going on in the economy,” Rob Feckner, CalPERS board president, said in a statement. “That's the real benefit of the risk-based approach we adopted. We have a much clearer view now of what's driving returns, and that means we can better anticipate performance. We're focused on risk to protect the portfolio.”
The changes included the hiring of Ms. Guillot. The former managing director and chief operating officer for Barclays Global Investors joined CalPERS in April 2010 and was given responsibility for the investment office's administrative functions.
After only about a month on the job, CalPERS got a big black eye. Former board member Alfred Villalobos, who had become a placement agent representing private equity and investment firms seeking CalPERS contracts, and former CalPERS CEO Fred Buenrostro were indicted by a state grand jury on fraud changes as part of an influence-peddling scandal.
Other CalPERS officials were lavishly entertained in exchange for helping Mr. Villalobos' clients win investment contracts, according to court documents. The scandal resulted in an overhaul of ethics, gift and travel rules.
But Ms. Guillot believes the story of CalPERS' transformation has been overshadowed by the scandal. “We're really trying to be a credible fund leader again after everything we've been through,” she said.
Tough to recruit
Not everything is going smoothly. It's tough to recruit new investment staffers because, on average, CalPERS pays only one-third to one-half what an investment manager can make at a firm, said CalPERS board member J. J. Jelincic.
Mr. Jelincic, who is on leave as a CalPERS investment officer, said CalPERS had contracted with several recruiters to fill positions without much luck. “Ninety percent of the people they contact say the salary is too low,” he said.
Fourteen percent of the positions in the investment office are unfilled. The office has 179 investment and portfolio officers on staff, but is trying to fill 30 openings, said CalPERS spokesman Wayne Davis. He said twenty-six are new positions while four openings have been created by attrition.
Ms. Guillot concedes salaries are lower than at money management firms, but believes working at CalPERS is still a great opportunity. “I think we have a compelling value proposition,” she said. “I think you make less money here than in the private sector, but the work is fascinating and you get to work on really interesting, complex issues that are in many ways relatively unique.”
An increase in staff would help CalPERS with its goal of increasing the money managed internally, Ms. Guillot said. She said internal management can produce big savings: It cost CalPERS $100 million to manage its $150 billion internal portfolio, vs. $1.1 billion for external firms to manage almost $80 billion for the fund.
“So, we are big believers in the value of internal management,” she said.
But Mr. Jelincic said the pension fund won't get to its goal unless it raises salaries.
Mr. Jelincic did praise the new risk management system, saying it was much needed. He recalled that in 2008, doing a paper search, he discovered that CalPERS had owned 26,000 acres of land near Phoenix for several years through three partnerships, but was unaware of its holding.
Mr. Jelincic said had CalPERS had the BarraOne system in place at the time, it would have been easier for staff to realize its large concentration, and sell some of the land.
He said CalPERS lost millions of dollars on the land, although he did not recall the exact amount. The pension funded ended giving back some of the land to a noteholder, he said.
Dan Sinnreich, executive director-risk management analytics for MSCI, which owns BarraOne, said CalPERS is the first pension fund to analyze data at such a granular level. “They are a pioneer,” he said, noting other pension plan clients are in the process of doing so. He said he could not release a list of clients using BarraOne.
One other pension fund — the $122.9 billion Florida Retirement System — plans to implement BarraOne in July to do detailed analysis between and among asset classes, said Dennis MacKee, spokesman for the Florida State Board of Administration, Tallahassee, which oversees the pension fund.
Whether better risk factors will make a material difference in CalPERS' investment performance remains to be seen. The pension fund reported a 1.1% return for calendar year 2011 and is still recovering from the market downtown that caused it to lose about a quarter of its assets.