CalPERS' $4.7 billion emerging markets equity portfolio incurred an opportunity loss of $203 million from July 31, 2002, through Dec. 31, 2005, according to a staff memo to the board. The $206.1 billion California Public Employees' Retirement System, Sacramento, imposed political stability, financial transparency and labor practice screens on the portfolio April 1, 2002, at the behest of state Treasurer Phil Angelides. The memo originally said the figure was $647 million but the number was later revised.
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, State Street Bank & Trust slashed its fee to $4 million a year — from $10.5 million — to retain the master custody contract for the system. 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.