The Securities Litigation Expert Blog

CalPERS Looking to Reduce Investment Complexity

Posted by Jack Duval

Aug 28, 2014 7:52:00 AM

This blog post continues our expert analysis of complex investments.

The Wall Street Journal recently reported that the California Public Employees’ Retirement System (CalPERS) is looking to simplify its portfolio. This move is significant because CalPERS led the charge into complex investments in the early 2000’s. Furthermore, because of its size, CalPERS is a bell-weather and other pensions and large asset managers tend to follow its lead.

The move to simplify began last fall when the pension released a set of investment principals that included, “(the fund) will take risk only where we have a strong belief we will be rewarded for it.”[1]

The implications of this are profound.  CalPERS, the largest pension fund in America, with over $295 billion in assets and a staff of 2,727,[2] is saying it has many investments that are too complex to know if they are being compensated for the risks in them.  Conversely, it may be that they can’t evaluate the risks in these complex investments.  Either way, CalPERS is saying they can’t come to a “strong belief” about these investments because of their complexity.

The CalPERS Investment Office has also been focusing on reducing complexity. In a March 12, 2013 presentation entitled “Performance and Cost Effectiveness", complexity is identified as a cost driver.[3]

Reducing portfolio construction and implementation complexity across all asset classes is identified as a priority.

Chart 1.  INVO Cost Drivers: Reducing Complexity[4]

 3.12.12_Calpers_Investment_Office_Reducing_Complexity_Extracted_P.5

 

This move to reduce complexity was reiterated in the CalPERS 2014 Beliefs, which stated, “We will also seek to reduce cost, risk and complexity related to manager selection and oversight.”[5]

If CalPERS, with a staff of 2,727 is looking to reduce the complexity of its investments, individuals with staffs of zero should do the same.

__________

 

Get Updates on Complex Investments

 

The Accelerant roster of complex investment experts includes:  Steve Pomerantz, Ph.D.Tom Boczar, Esq., CFATom Brakke, CFAGerry Guild, CFA, and John Duval, Sr.

You can find our complete roster of securities experts here.

Notes

[1]           Dan Fitzpatrick, “Calpers Rethinks Its Risky Investments”, The Wall Street Journal, August 10, 2014; Available at http://online.wsj.com/articles/calpers-rethinks-its-risky-investments-1407710758; Accessed August 27, 2014.

[2]           CalPERS Facts at a Glance, August 2014; Available at http://www.calpers.ca.gov/eip-docs/about/facts/facts-at-a-glance.pdf; Accessed August 28, 2014.

[3]           CalPERS Investment Office, “Performance and Cost Effectiveness”, Janine Guillot, COIO, March 12, 2012; Available at http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/invest/201203/item06b-01.pdf; Accessed August 27, 2014.

[4]           Id. at 5.

[5]           CalPERS Beliefs: Thought leadership for generations to come, May 2014, 9; Available at http://www.calpers.ca.gov/eip-docs/about/pubs/calpers-beliefs.pdf; Accessed August 27, 2014.

  

 

 

 

Read More

Topics: Complex Investments, Investment Complexity, Complex Investment Expert, CalPERS

Subscribe to Email Updates

Recent Posts

Posts by Topic

see all