“He was described by Institutional Investor as a smooth politician, which is crucial for survival in his role as a former CIO of CalPERS. Interestingly, the CIO role, which stands for ‘investment,’ was said to have ‘nothing to do with investing.’ For those unfamiliar with CalPERS, it manages pension and health benefits for over one million public employees and retirees, overseeing the largest pension fund in the country worth over $450 billion. Given the immense assets under management, the CIO role at CalPERS is prestigious and powerful, but also notoriously difficult to maintain, with a new CIO appointed roughly every other year.
Rather than diving into the governance issues surrounding CalPERS, which has already been extensively covered, this article aims to use CalPERS’ investment approach as a starting point for a broader discussion on portfolio allocation, returns, fees, and wasted effort. By doing so, we hope to alleviate some of the stress associated with personal portfolio positioning.
CalPERS’ investment approach has been criticized for its inefficiencies. Despite its mission to deliver retirement and healthcare benefits, the pension fund invests heavily in private funds and pays inflated salaries to private equity and hedge fund managers. The complexity of its structure is evident in its 118-page Investment Policy document and 286-page list of investments and funds. Additionally, CalPERS struggled to calculate the fees it pays for its private investments. Notably, high fees are primarily attributed to its private equity allocation, which it plans to increase despite underperformance.
To evaluate the effectiveness of CalPERS’ investment approach, we compare its historical returns to three basic portfolio strategies starting from 1985. The results show that CalPERS fails to outperform these simple benchmarks, suggesting that all the time, money, and resources spent on its investment strategy were wasted. In fact, CalPERS could have achieved better results by firing its staff and investing in ETFs, potentially saving millions in operating costs and external fund fees.
Considering the underperformance of CalPERS, one may question if it is an isolated case or reflective of the industry as a whole. To address this, we analyze the performance of Bridgewater, the largest hedge fund manager. Despite offering two main portfolios, the “All Weather” and “Pure Alpha” strategies, both fall short of basic buy-and-hold and global market portfolio benchmarks. It raises the question of whether private pension funds and institutions should rely on hedge fund managers when these simple strategies outperform.
In conclusion, the article suggests that CalPERS’ investment approach, as well as the performance of Bridgewater, highlights the inefficiencies and underperformance of complex investment strategies. It proposes that a simple, diversified, and low-cost approach, such as investing in ETFs, may be a more effective way to manage portfolios, ultimately saving costs and improving returns.”
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