Friday, July 20, 2012

California Public Employees Retirement Fund Has Rate of Return on Portfolio Goal of 7.5% per Year

Fund Earned 1% in the Past Year by Employing Top Investment Managers

That’s Okay – Just Means they Have to Earn 15% Next Year to Make It Up

One of the truly laughable things in the investment world is the rate of return pension funds expect to earn on their investments.  These rates are incredibly high – not because they actually think they will earn those returns but because by forecasting high rates they reduce the amount of contributions that need to be made to the funds.

So California recognized its problem and recently reduced its expected rate of return.  The reduction was a whopping one, from 7.7% to 7.5% per year.  And lo and behold in the year just ended the portfolio earned a whopping 1%.  Of course the fund management found a whole lot of other people to blame.

Calpers's underperformance was particularly stark because the fund missed some of its own internal benchmarks. Mr. Dear blamed the fund's negative 7.2% stock return partly on losses in emerging-market investments and on the selection of certain investment managers. He didn't name them.

Over the same one-year period ending June 30, the Dow Jones Industrial Average rose 3.8%.

Now everybody needs to understand just what this means.  Calpers paid highly experienced investment managers millions in management fees to produce a performance that reduced the value of the portfolio by 7.2% when if the fund had just invested in the Dow Jones mix it would have earned 3.8%.  In other words, a fund manager who was a near congenital idiot could have done better than the Calpers managers.

Has Calpers learned anything from all this, probably not.

This year, Calpers lowered its annual investment return target to 7.5% from 7.75%. Despite recent difficulties, Mr. Dear said on a conference call Monday that he believed the fund's target still was attainable, though he acknowledged "we are going to have to employ new strategies."

Really, and what new strategies would that be – maybe bank robbing, maybe holding up the Yuma stagecoach, maybe counterfeiting?  Okay, that might do it, because it’s pretty certain the current plan ain’t working. 

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