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Pension-Gate: CalPERS Performance for the Fiscal Year Ending 6/30/2013

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Well, the good news is that the overall reported return of 12.5% for this $257 billion behemoth is higher than the 7.5% rate used by CalPERS to value its future liabilities. The bad news is that when we dig into the underlying components of the 12.5%, we see a major problem with the management of CalPERS. Here is the breakdown provided by CalPERS in its official press release:

The number that we will focus on is the public equity return of 19.0%. Below are the returns of the three most commonly used public equity benchmarks for pension plans and other large institutional investors, as well as the return of IFA’s full equity Index Portfolio 100 (net of a 0.05% advisory fee):

Sources and Disclosures: DFA Returns 2.0,

As you can see, there is no combination of these three index returns (other than having at least 80% in the MSCI EAFE Index) that yields 19.0%. Please bear in mind that with CalPERS size, the cost of investing in any fund that tracks one of these indexes should be close to zero. Furthermore, any additional costs such as investment advisory or investment consulting fees should also be very small. Since CalPERS already indexes a portion of its public equity investments, this would imply that the active portion had an especially poor return. Perhaps CalPERS will spell out the ugly details in a future report.

In a prior article on, we discussed how CalPERS was considering dropping its current active approach to embrace a more passive investment strategy. According to Pensions & Investments, “CalPERS’ investment committee is considering whether active managers, once fees are taken into consideration, achieve better returns than the fund’s passive index strategies?” To us, the answer was obvious before the implied dismal results for active management evident in this report, but hopefully this will be the tipping point that starts the transition from active to passive. Of course, we recognize that one major impediment to this transition is the implied admission that CalPERS has been managed in a sub-optimal manner until now, and no person in their right mind would want to take the fall for that. Nevertheless, with enough pressure, CalPERS will eventually overcome this inertia, and we will not give up fighting this fight that so badly needs to be fought on behalf of California’s beleaguered taxpayers.