CalPERS looking to add consultants to its pool

SACRAMENTO, Calif. — CalPERS is considering issuing RFPs for general consultants to refresh its backup stable and for a specialty private equity consultant.

“The investment program has changed in scale and complexity since 2003, when the last RFP for general pension consulting services was conducted,” staff at the $232.1 billion California Public Employees' Retirement System wrote in a memo to the investment committee. Staff will search for general consultants and may ask them to provide specific services, including investment analysis and research, strategic analysis, organizational and structural analysis among others. The private equity consultant would offer advice on the $25 billion private equity portfolio.

Currently in CalPERS' general consulting pool are Pension Consulting Alliance, Callan Associates, Mercer, R.V. Kuhns and Strategic Investment Solutions; their contracts expire June 30, 2009. All can rebid, said CalPERS spokesman Clark McKinley.

The RFPs require investment committee approval; the recommendations will be discussed at the committee's Sept. 15 meeting. The search does not affect general consultant Wilshire Associates.

Also on Sept. 15, the committee will vote on adding real estate consultants David L. Bonuccelli & Associates, PCA and Stockbridge Capital Group to a group of 14 existing real estate consultants for special projects.

And CalPERS staff plans to renew the contracts of 23 international equity and fixed-income managers, which run a combined $19 billion, for one year, pending approval of the investment committee.

“We support the annual contract renewal recommendation as the current stable of (international equity) managers has outperformed since inception, and only slightly underperformed in the two most recent fiscal years,” Michael Schlachter, managing director at general investment consultant Wilshire Associates, wrote in a memo to Anne Stausboll, CalPERS' interim chief investment officer.

“The investment committee should be pleased with a program that outperformed overall for the year and renew all five managers' contracts for another year,” Mr. Schlachter, wrote about the fixed-income portfolio.

CalPERS' 18 international equity managers run a total of $14.3 billion; five international fixed-income managers handle a combined $4.72 billion. Genesis Investment Management LLP, London, the manager with the largest international equity portfolio, runs a $1.4 billion emerging markets strategy. The largest fixed-income manager is AllianceBernstein Holding LP, New York, which runs $1.3 billion in international fixed income.

CalPERS reported a return of -2.6% for the year ended June 30, slightly worse than the -2.4% loss staff predicted in July. The $117.7 billion global equities portfolio was the worst-performing asset class, with a total return of -11.4% vs. -10.2% for the custom benchmark, according to a Wilshire report. The private equity portfolio posted the strongest yearlong returns at 19.6%.

Separately, Wilshire is recommending CalPERS add managers that specialize in small-cap, midcap and smidcap equities to its roster of domestic equity managers, to move away from the large-cap bias currently in the external domestic equity portfolio, according to a letter from Wilshire to staff.

In the past, the size of CalPERS' global equity portfolio prevented the pension fund from entering the capacity-constrained segment of the market, wrote Andrew Junkin, managing director at Wilshire, in the letter. But inefficiency in the small-midcap markets provides potential for additional alpha. Meanwhile, Wilshire has tracked 506 different products that are open to new investors.

The letter is in response to a staff review of CalPERS' $6.4 billion external domestic equity portfolio, which underperformed its benchmark by 151 basis points for the year ended June 30.

However, staff is recommending the investment committee renew the contracts of the fund's 12 domestic equity managers for one year. CalPERS staff will still have the ability to terminate managers throughout the year if they underperform.

And the CalPERS staff is keeping a close watch on U.K. fund manager Hermes' Focus Asset Management portfolio, a corporate governance portfolio, according to a review of the $232.1 billion pension fund's corporate governance managers recently posted on its website.

CalPERS invested $310 million in the Focus portfolio, which was down 30.79% for the year ended June 30, underperforming the FTSE All Share index by 17.43 percentage points.

For the three-year period, it returned an annualized 2.8%, underperforming the FTSE All Share index by 8.37 percentage points.

“Hermes has been notified of staff concerns regarding the long-term underperformance of this portfolio,” the review noted.

Mark O'Connor, director of marketing at Hermes in London, did not return a call for comment.

Contact Raquel Pichardo at [email protected]