New policies helped CalPERS weather market turbulence
This month's plunging stock prices cost the state's biggest public pension fund $9 billion, but the fallout from the "market riot" could have been much worse, said Joseph Dear, chief investment officer of the California Public Employees' Retirement System.
Although the $228-billion portfolio lost only 1.7% of its value in the week-long period between Friday, Aug. 5 and Friday, Aug. 12, "it was a wild ride with eerie echoes of 2008," the roughest stretch of the recent recession, Dear reported to the CalPERS board Wednesday.
CalPERS posted a 20.7% return in the fiscal year that ended June 30, the best result in 14 years.
Dear credited an earlier CalPERS decision to keep 4% of its assets in cash for helping the pension fund have the flexibility it needed to react to extreme market volatility.
"The wild ride tested the robustness of our risk mangement in a dificult environment," Dear said. "We did OK."
Though the last two weeks turned out not to be 2008 all over again, they underscored that many of the factors contributing to the recession -- such as excessive private-sector debt, insufficient regulation of financial institutions and compensation policies that emphasize short-term profits -- have not been addressed, Dear said.
As a result, the decision by financial rating service Standard & Poor's to downgrade the United States from AAA to AA+ unleashed the market's "animal spirits" and weakened confidence in the ability of national leaders to fix the economy, he said.
Investors came away with the impression that "the political system is incapable and could not produce the hard choices on revenue and spending that must be made," Dear said.
Going forward, CalPERS could have a hard time getting double-digit returns in the current fical year as the economy suffers through a slow recovery with high unemployment and weak consumer demand, he said.
The biggest question remains Europe, where high levels of public debt could send the economic dominos tumbling, Dear warned.
"The [European] banks are the weak link in the financial system," he said.
-- Marc Lifsher
Photo: CalPERS Chief Investment Officer Joseph Dear. Credit: Los Angeles Times