As chief investment officer of the nation's largest public pension system, Joseph A. Dear always seems on the run. Running the $232.2 billion California Public Employees' Retirement System, Sacramento, means attending lots of meetings, which might explain why Mr. Dear stays on point. There is a not a lot of room for chitchat when the next meeting is only minutes away. It's not that Mr. Dear can't share a laugh at a good joke, but it's clear he doesn't have a lot of time to waste as he goes about CalPERS' business. And it's no coincidence that Mr. Dear's hobbies include running.
Of course, Mr. Dear walked into a pretty serious situation. When he arrived on March 2, 2009, CalPERS' investment staff was attempting to deal with the financial crisis and massive losses at the pension system. By the end of its fiscal year four months later, CalPERS had lost 23.4% of its assets. Mr. Dear can now speak of improved results. A 12.5% return on investments for calendar 2010 was a positive sign, but recent fluctuations in the markets have resulted in more modest gains. CalPERS earned a 4.09% investment return in the first quarter of 2011. But there have been distractions, notably the charges of “pay to play” against Fred Buenrostro, CalPERS' former executive director, and Alfred Villalobos, a board member turned placement agent in 2010. That has led to bans on the use of placement agents by money managers as well as new policies limiting gifts to CalPERS staff and board members.
Mr. Dear joined CalPERS after serving as the executive director for the $52 billion Washington State Investment Board, Olympia, but his resume also lists such jobs as chief of staff for former Washington Gov. Gary Locke and assistant secretary of Labor for Occupational Safety and Health Administration in the Clinton administration.
Regardless of the job, Mr. Dear views himself as a problem solver who relishes going into a place, analyzing it and reconstructing it to improve performance.
What has been your biggest challenge at CalPERS? There are three major challenges at CalPERS: One is steering the fund during very turbulent times; applying the lessons that the financial crisis has taught us; and third, inspiring the staff in restoring confidence in the organization.
Let's talk about steering CalPERS in the right direction. Well, we made two reviews of our asset allocations and embarked on a significant increase in the capabilities and the effort we put in risk management, and we are building up the operational capabilities of the organization for information technology, compliance and the transaction process. On the investment side, it's largely a product of having the courage of our conviction. (We are a) large pension plan with a reasonably ambitious return target. Ours is 7.75%. ... (CalPERS) needs to have a portfolio with a lot of growth exposure and is seeking enhanced return from alternative asset classes. That doesn't represent a change under my watch; we just reaffirm that as a long-term strategy for CalPERS.
What was your biggest surprise coming to CalPERS? The ethical issues that were raised around the conduct of former members and staff, and the resulting time it took to resolve the questions that were raised about the integrity of operations.
Very few people thought there would be two market crashes in a decade. Are we in a new era of unexpected financial calamities and how does CalPERS position itself for that? I think there is higher volatility and uncertainty in this environment post-crash, post-financial crisis, but there is no reason to believe the fundamental dynamics of the capital system have changed or the fundamental lessons of what constitutes good investments (and what) the foibles of human nature mean for a successful long-term investment program.
What do you mean by “foibles”? Well, not all people are rational all the time. There is herding, there is overenthusiasm, there is forgetting the lessons of history to the degree to which classic investment theory assumes that all those investors will be rational. It creates opportunity from time to time for those who are steadier in their focus.
CalPERS has been working to improve its risk management system. What are you trying to do there? Well, risk management involves both quantitative tools and qualitative judgment. It is important to focus on both of them and not just one or the other. On the quantitative side we are building a new risk application to improve the quality of data and our ability to see through the entire portfolio. In addition our new, revised custody agreement with State Street involves better analytics and data on the quantitative side of risks. On the qualitative side, it's a matter of better judgment and that depends in a large part on the ability of the senior management team and other investment staff to collaborate together and to share insight as well as help each other navigate through these uncertain markets.
What has CalPERS learned from the last financial meltdown? Lessons of the crisis are obviously a disciplined focus on risk management, careful attention to exposures that, in the crisis, were revealed to be really important, such as liquidity and leverage, and finally, the necessity of sharing the insight of different asset class managers so that the total fund can be operated on a portfolio basis and not on an isolated, or silo, basis.
One of the hardest-hit asset classes during the meltdown was real estate. What lessons specifically are there for that portfolio and how does the new real estate policy reflect that? Well ... real estate was the area of the largest loss and where the lessons of the crisis are most painfully learned. Maintaining investment discipline, having a decision process which is repeatable, minding leverage and liquidity (and) counterparty exposure. The portfolio has been restructured at great cost and a new strategy has been developed which returns CalPERS to what it used to have in real estate — a much more income-orientated, lower-risk, core-oriented portfolio.
You have been a strong advocate of reducing the fees CalPERS pays external investment managers. Is this an ongoing issue? Absolutely. Cost really does matter. ... As we go through negotiation of terms and conditions ... (as) private equity and as other managers return to the market, we will be more focused on the cost.
Last year, the CalPERS board approved a rule that would prevent staff from receiving bonuses in years when the fund's portfolio returns are negative. Do you think such criteria could be discouraging for employees? CalPERS strives to be an above-average payer, and has for the public sector, a strong incentive program. But a large part of working at CalPERS has to be a satisfaction drive in serving the interest of hardworking state and local government employees, and if that doesn't have meaning for you, then you're probably better off in the private sector.
What about the new no-gift policy for staff. Does that go too far? The no-gift policy makes sense because nothing is more important for an organization than their reputation for integrity. We can't have our beneficiaries believing that the decisions (at) CalPERS are made for any other reason than the best interest of the fund, that we are true fiduciaries. And that does come at a cost for our investment officers, but it is a price worth paying because we need to conduct ourselves in a way that's above reproach.