State Street Bank & Trust slashed its fee to $4 million a year - from $10.5 million - to retain the master custody contract for the $206.1 billion California Public Employees' Retirement System, Sacramento. CalPERS today posted a staff recommendation that State Street be retained for the contract, one of the most coveted in the industry. The CalPERS investment committee will vote on the recommendation Feb. 14. State Street last was awarded the master custody contract in 2000.
The other finalists were Bank of New York and Northern Trust. R.V. Kuhns was the consultant.
Separately, CalPERS' $4.7 billion emerging markets equity portfolio incurred an opportunity loss of $641.5 million from July 31, 2002, through Dec. 31, 2005, according to a staff memo to the board. The fund imposed political stability, financial transparency and labor practice screens on the portfolio April 1, 2002, at the behest of state Treasurer Phil Angelides.
According to draft research from Wilshire Associates, CalPERS' custom FTSE All Emerging Markets index underperformed the standard FTSE All Emerging Market index by 2.2 percentage points from April 1, 2002, through year-end 2005. The permissible markets list excludes roughly 10% of available market capitalization as of April 2005. The result has been a riskier portfolio, CalPERS officials noted in their memo.
Two of CalPERS' three emerging markets equity managers produced better returns for clients with unconstrained portfolios during the period. Genesis Asset Managers underperformed its 39.1% return for unconstrained portfolios by 6.7 percentage points, while AllianceBernstein fell 2.4 points short of its 42.2% unconstrained return. However, Dimensional Fund Advisors beat its unconstrained return of 33.4% by two percentage points. The asset-weighted annual difference in returns was -2.1 percentage points, equivalent to a $641.5 million opportunity loss, staff noted.
Separately, CalPERS hired O'Connor Global Quantitative Equity, a unit of UBS AG, to manage an initial contribution of $50 million to its global market-neutral strategy. CalPERS also made an initial contribution of $50 million to The 32 Capital Fund, a global market-neutral strategy managed by Barclays Global Investors.
In private equities, CalPERS committed $30 million to Carlyle Asia Growth Partners III, a venture and growth equity fund that will target emerging companies in China, India, Japan and South Korea. The pension fund also will commit up to $30 million to DFJ Element, a limited partnership with Draper Fisher Jurvetson that will invest in clean technology businesses. CalPERS also committed $15 million to Rockport Capital Partners II, a $261 million fund investing in energy and environmental technology firms.