Pat officials of the California Public Employees' Retirement System on the back. The officials, contrary to typical psychological behavior, faced head on the possibility of regret over the termination of some of the fund's managers.
The officials decided to continue to track the performance of three value managers after they were dropped from the fund's roster. And to compare their returns with the returns of the four value managers hired as replacements.
The results were mixed. But the effort produced a valuable lesson other pension funds should emulate and CalPERS should expand. That is, funds should continue to track their former managers, at least for a number of years after their termination, and compare them with their replacements.
CalPERS, which made the changes last year, tracked the old managers for six months. As it turned out, Brinson Partners Inc., one of the three managers terminated, performed better than two of the four new managers. The two new managers that underperformed run 57% of the allocation. As a group, the new managers beat the old managers, returning a weighted-average of 21.3% compared with 15.6%, generally vindicating the changes CalPERS made.
But the results of tracking the terminated managers suggest some additional lessons.
One is that perhaps CalPERS moved too quickly in dropping Brinson, which it had hired only in May 1998. The system worried about the turnover of senior investment professionals and significant underperformance against its custom benchmark. Turnover of staff is a legitimate concern, but should be observed for a reasonable period before a manager is terminated. Perhaps the results of the study will give the system more patience in waiting for a manager's performance to turn around, or a better notion of when to time a termination or hiring.
Second, it's not always easy to find a better manager than the one that has been terminated.
These are lessons not only for CalPERS, but all funds, and CalPERS officials deserve credit for not going into denial, or avoiding the psychological pain of regret. They also are to be commended for making the results public.