SACRAMENTO, Calif. - South Africa-related investment restrictions inflicted more than $500 million in opportunity costs on the $80 billion California Public Employees' Retirement System.
The costs represented investment returns forgone because the fund could not invest in the stocks of companies doing business with South Africa, many of which performed strongly during the period.
That revelation followed news the fund suffered its worst one-year investment performance in a decade during 1994.
Chief Investment Officer Sheryl Pressler labeled the opportunity loss conservative. She said it occurred between Jan. 1, 1987, and June 30, 1994, during which time the fund was forbidden from investing in most companies doing business in South Africa. The restrictions - called the South Africa Divestment Act and approved by the California Legislature - have since been lifted.
Opportunity loss is the value of investment returns not earned because of the investment restrictions.
Although national figures on how divestment laws affected pension funds aren't available, Stephen Nesbitt, a senior vice president with Wilshire Associates, Santa Monica, Calif., said that based on the information he has seen, he believes divestment basically hurt the performance of pension funds nationwide.
Mr. Nesbitt said the extent of the harm depended on the time the divestment laws were enacted and the scope of the law. Wilshire is the fund's consultant.
Earlier political promises that losses as a result of the South Africa restrictions wouldn't happen or would be made up by the state were "all a bunch of phony baloney," said Charles Valdes, the fund's investment committee chairman.
It was unlikely the fund could ever recover the losses from the state because the wording of the divestiture law was too vague, he said.
Ms. Pressler's report to trustees showing the divestiture costs came at the same time the trustees learned the fund's investments returned -0.8 during 1994 as a result of poor performing bond and stock markets. The same number is the median return for large public funds from the Trust Universe Comparison Service of Wilshire Associates Inc.
Board members also are concerned about pension consultants' warnings that the 1990s won't match the high investment returns of the 1980s. Falling investment performance can mean a lower funded level for the pension fund and higher employer contributions to it.
According to Wilshire's figures, the pension fund had an opportunity cost of $590 million between Jan. 1, 1987 and Dec. 31, 1990. For calendar year 1991, the opportunity cost was an additional $114 million. The total opportunity loss to the pension fund was $704 million.
But during the period Jan. 1, 1992 to June 30, 1994, the pension fund had an opportunity benefit of $175 million, resulting in the $529 million net opportunity loss to the fund for the entire period.
According to Mr. Nesbitt, the overall opportunity cost was primarily in the pharmaceutical area domestically and in U.K. stocks internationally.
Many multinational pharmaceutical companies continued to do business in South Africa, and their stocks performed well during the restricted period. Also, many U.K. stocks did well and many of them continued to do business in South Africa, but the pension fund had to divest itself of many of those.
According to a Wilshire report, the pension fund's international portfolio was more heavily weighted in Japan and less heavily weighted in European markets than was the Morgan Stanley Capital International Europe Australasia Far East Index as a result of the restrictions.
Domestically, the retirement system's stock portfolio was more heavily weighted in smaller stocks and less in large, multinational corporations, compared with the Wilshire 2500.
On the possibility of recovering the loss from the state, as the law supposedly provided, Mr. Valdes said: "The language in the law was worded in such a fashion that were there ever to be a court judgment against us because we had somehow violated our fiduciary duty for losses (as a result of the divestment act), then the state might be liable if it appropriated the money."
The pension fund can't sue the state for the money, said Mr. Valdes, because no one has sued the pension fund for violating its fiduciary duty.
He doesn't expect anyone will sue. "Nobody can afford those kinds of lawsuits, and it is an iffy proposition on whether you can (succeed)," said Mr. Valdes, who is an attorney. Even then, he said, the state would have to reimburse the pension fund only if the Legislature appropriated the money.
At the time the Legislature passed the act, political backers said there likely would be no negative investment performance impact. But Mr. Valdes now says: "That was what the political backers said, but they weren't investment types. How would they know? They just wanted to do this for political effect. They didn't mind using our fund as a playground, and then put in that weasel-worded language about indemnity."
Mr. Valdes added: "It (the cost of the divestment act to the pension fund) was another demonstration that you need to keep legislators and politicians out of the investment business."