CalPERS' plans to extend its current master custody contract with State Street Bank and Trust was greeted today with an objection by Bill Lockyer, state treasurer, who said, “I guess we do business with crooks.”
Mr. Lockyer's comment alluded to a current lawsuit by California Attorney General Edmund G. Brown Jr. against State Street, accusing it of overcharging the $202.1 billion California Public Employees' Retirement System, Sacramento, and the $134.1 billion California State Teachers' Retirement System, West Sacramento.
Matthew Flynn, division chief, operations, performance and technology, made the announcement of the one-year extension for State Street but added that the system would issue an RFP for a new custodian by July.
Mr. Lockyer, also a member of the CalPERS' board, objected to renewing the contract and asked Mr. Flynn if the fund could avoid the renewal while an RFP is issued. Mr. Flynn said that wasn't possible because the RFP process would not be completed in time for a new custodian to be chosen before State Street's contract expires.
State Street's current contract, already in its second one-year extension, will be extended one final year through July 1, 2011. The RFP will be for a contract effective April 1, 2011, providing a three-month transition period.
Arlene Roberts, State Street spokeswoman, did not return a phone call for comment by press time.
Also today, the system's investment committee discussed an asset allocation study scheduled to be conducted this year that is expected to include examining the use of leveraged bonds as a way to diversify risk in the entire CalPERS portfolio. That strategy would be similar to one adopted by the State of Wisconsin Investment Board, Madison, for its $67.8 billion core fund.
Michael Schlachter, consultant with Wilshire Associates, said the leverage strategy would help CalPERS' investment portfolio if equity prices decline, but he added that if there was a repeat of 1994 when interest rates went up, there would be a “public relations nightmare.”
Farouki Majeed, senior investment officer for CalPERS for asset allocation and risk management, said final recommendations on strategic asset allocations will be made in December.