The "CalPERS effect" is shrinking.
When the $170 billion California Public Employees' Retirement System places companies on its infamous list of poorly performing stocks, those losers, in aggregate, turn into winners. But the amount of value they add to the Sacramento-based system's portfolio has been decreasing over time, according to two researchers at Wilshire Associates Inc., Santa Monica, Calif.
In a study of 113 companies placed on CalPERS' focus list between 1987 and mid-2003, Wilshire Managing Director Rosalind M. Hewsenian and Senior Associate John Noh found that those stocks lost, on average, a cumulative 97.7 percentage points— or an annualized 14.6% — compared with their respective benchmarks during the five years before being added to the list. In the five years following inclusion, the average stock beat its benchmark by 8.1 percentage points, or a statistically insignificant 160 basis points a year. That's down sharply from 54 percentage points for the five years ended June 30, 1995.
One possible explanation: CalPERS was less aggressive in the late 1990s, no longer targeting companies that sought to shield themselves behind anti-takeover statutes or devices such as poison pills. CalPERS has been taking a harder line in the past few years, but the effort hasn't yet shown up in the latest figures, possibly because weak markets in three of the last five years may have resulted in a flight to quality stocks, the study said.
While excess returns are down, the study observed that inclusion on the list halted the precipitous decline in shareholder value that occurred in the preceding years.