Questions swirl around CalPERS resignation

The abrupt Aug. 5 resignation of CalPERS CIO Yu "Ben" Meng leaves behind an ambitious plan to include embedded leverage in its asset allocation that he had championed to achieve a 7% expected rate of return — and questions about ethics and oversight at the country's largest public pension plan.

The day after Mr. Meng's departure, the $403.8 billion California Public Employees' Retirement System, Sacramento, scheduled an emergency, closed-session board meeting for Aug. 17 to discuss "performance, employment and personnel items."

The meeting comes in the wake of a complaint against Mr. Meng filed on Aug. 4 with the California Fair Political Practices Commission, and Mr. Meng's disclosure in an annual report filed with CalPERS that he personally invested in the stock of two private equity firms — Carlyle Group Inc. and The Blackstone Group Inc. — as well as Ares Management Corp.'s business development company, Ares Capital Corp.

It is unclear when Mr. Meng filed the disclosure report, which shows he held $10,001 to $100,000 in each of the three entities. A commission spokesman said he could not provide information about the complaint. CalPERS has invested with all three firms in the past. Since Mr. Meng became CalPERS CIO in January 2019, CalPERS com- mitted $328 million to Carlyle Europe Partners V and $1 billion to Blackstone Core Equity Partners II, a long-hold buyout fund managed by Blackstone Group.

To guard against conflicts of interest, CalPERS requires the CIO to report all investments and positions in business entities. The CIO also must report income — including gifts, loans and travel payments — from sources that would contract with CalPERS or from sources in which board-administered funds may invest, or from intermediaries such as consultants or placement agents. The CIO also must report all interest in California real estate.

The day after Mr. Meng's resignation was announced, California Controller and CalPERS board member Betty T. Yee called for the emergency board meeting.

"I take my fiduciary duty to safeguard CalPERS investments on behalf of the members very seriously," Ms. Yee said in a written statement. "I am incredibly disappointed to hear about the former CIO's lapse in both judgment and adherence to standard conflict-of-interest policies."

"I have called for an emergency board meeting to discuss this situation, review these policies, the CEO's oversight and implementation of these policies, and any additional safeguards necessary to ensure this does not happen again," Ms. Yee said.

In the meantime, Dan Bienvenue, deputy chief investment officer, total portfolio, was named interim CIO, according to a news release announcing Mr. Meng's resignation.

At CalPERS, only the CEO — Marcie Frost — reports to the board. During the tenure of Ms. Frost's predecessor, Anne Stausboll, the board agreed to have the CIO report to the CEO and not the board. Ms. Frost joined CalPERS as CEO in October 2016.

In May 2018, the board gave the sole responsibility for hiring, firing and setting compensation for the CIO to the CEO alone. Prior to then, the board and CEO shared that responsibility.

Former CalPERS board member and former member of the California State Personnel Board Richard Costigan said he supported making the CEO responsible for hiring, firing and setting the compensation for the CIO because "as a civil servant, that's exactly how the structure is supposed to be."

Ms. Frost was searching for a new CIO at the time and told the board she would invite board members to be part of the hiring process.

It was Ms. Frost's decision to rehire Mr. Meng, who at the time was deputy CIO at China's State Administration of Foreign Exchange, an administrative agency that manages China's foreign exchange reserves. Before that, he had worked in CalPERS' investment office in roles including investment director of asset allocation.

Ms. Frost also supported Mr. Meng earlier this year, including sending CalPERS officials for an in-person meeting with the staff of Rep. James E. Banks, R-Ind. Mr. Banks wrote a Feb. 12 letter asking California Gov. Gavin Newsom to investigate Mr. Meng for investing more pension fund capital in Chinese companies.

In a subsequent letter to Mr. Banks, Ms. Frost noted that CalPERS officials rely on indexes and do not select the companies the pension fund invests in, and that Mr. Newsom does not hire the CalPERS CIO.

CalPERS officials declined to comment beyond the news release announcing Mr. Meng's departure or to make Ms. Frost available for an interview. Mr. Meng also could not be reached for comment.

In the news release, Mr. Meng said: "I deeply believe in the CalPERS mission of serving those who serve California. I'm proud of the work we did to change the portfolio, build a skilled investment office, and set CalPERS on a strong path to achieve our return target. But at this time, it's important for me to focus on my health and on my family and move on to the next chapter in my life."

CalPERS recently announced a 4.7% preliminary net return for the fiscal year ended June 30 against its benchmark of 4.3%; a five-year return of 6.3% and a 10-year return of 8.5%. The pension fund has said its five- and 10-year benchmarks would be available in September.

The current controversy was touched off when Mr. Meng disclosed his personal investments, which included shares in Carlyle, Blackstone and and Ares' business development company, in his disclosure form filed with CalPERS. The California Fair Political Practices Commission typically receives the statement, known as Form 700, from certain top officials at CalPERS, with other staff, including Mr. Meng, filing with CalPERS, said Jay Wierenga, communications director for the California Fair Political Practices Commission, in an email.

Once a complaint is filed, the commission's enforcement division first reviews it to determine whether or not to open an investigation, he said. The review process can take from a few days to a few weeks, Mr. Wierenga said.

"CalPERS has known about questions regarding Ben's fair political practices disclosure filings," said Henry Jones, CalPERS board president, in a written statement. "These are private personnel matters and already have been addressed according to our internal compliance protocols."

CalPERS is moving forward and is recruiting a new CIO, Mr. Jones said.

During Mr. Meng's tenure, CalPERS shifted the investment office from asset class silos to an integrated structure. He also centralized the use of leverage across the portfolio, including leveraging the entire portfolio up to 20% in order to commit more capital to private equity and private credit.

CalPERS also increased the percentage of the plan invested in opportunistic strategies to 5% from 3%, a bucket that is not part of its asset allocation, and skewed those strategies toward credit investments. At the same time, the board changed its total plan benchmark methodology to help it avoid the denominator effect of a down market on alternative investments.

CalPERS board is expected to consider an additional move — embedding leverage in its asset allocation — during its asset allocation review, scheduled to start in 2021.

It is an open question whether the next CIO will champion the program Mr. Meng put into place. Sources said that projects started by one CIO can fall by the wayside under the next one.

CalPERS spokesman Wayne Davis noted that the investment strategy is CalPERS' strategy and not Mr. Meng's.

Indeed, in an interview in June, Eric Baggesen, CalPERS managing investment director, trust level portfolio management, said that staff first started considering the idea of including moderate leverage in its asset allocation as a way of boosting returns in a low interest rate environment after the 2008 financial crisis.

Mr. Meng continues to have his supporters on the board.

"He started out by conducting a comprehensive review of the portfolio and built measures to protect it in a market crisis, which did happen," California Treasurer Fiona Ma said of Mr. Meng in an email. "His preparations helped CalPERS greatly in navigating through the COVID-19 crisis. ... Ben also set the portfolio on a better path toward a 7% solution with better and more assets."