Behind CalPERS' staggering real estate losses lies a strategy that took on too much risk and lacked adequate oversight.
Once the fund's star asset class, the real estate portfolio of the $201.1 billion California Public Employees' Retirement System lost nearly half its value during the one-year period ended Sept. 30. The fund's real estate consultant, Pension Consulting Alliance Inc., predicts losses will continue for at least another year.
At the heart of the problem is a freewheeling approach that took on massive leverage, gave enormous discretion to staff and experienced poor timing with its investments.
The decision-making process and risk management need to be much more rigorous, acknowledged Joseph A. Dear, who joined CalPERS as chief investment officer earlier this year. The control over leverage was not as robust as it needs to be, he added. The system will focus more on income-producing, less risky core investments in the future, he said.
“We're inclined toward investment vehicles where we have control,” Mr. Dear said. “This does not rule out fund investing,” he added.
“Hindsight suggests that a large number of CalPERS' real estate investments were extraordinarily ill-timed and inadequately underwritten,” said Stuart Gabriel, professor of finance and director, UCLA Ziman Center for Real Estate in Los Angeles. Mr. Gabriel is not connected with CalPERS.
In recognition of the portfolio's problems, the CalPERS board has imposed new limits on staff's independent investment authority, system officials are revamping its $13.5 billion portfolio and they might ax some of the fund's roughly 70 external real estate managers. (Already, MacFarlane Partners has resigned its account after a nearly $1 billion failed land deal.)