Bear market bites CalPERS and CalSTRS pension funds

California’s two big pension funds for public workers lost money on their investment portfolios in the fiscal year ended June 30, the funds reported today.

The red ink at the California Public Employees’ Retirement System and the California State Teachers’ Retirement System wasn’t a surprise, given the stock market’s dive over the last year. (Despite the funds' diversification, stocks still make up more than half of their holdings.)

But too many years like this one would be bad news all around -- because, dear fellow California taxpayer, guess who risks getting stuck with the bill if the pension funds can’t earn enough to pay the benefits already promised to public-sector workers?

CalPERS said it lost 2.4% in the June 30 fiscal year on its $239-billion fund. CalSTRS’ $162-billion fund had a loss of 3.7%.

The numbers are preliminary, and the final losses probably will be worse because both funds measure their holdings in real estate and private-equity investments only through March 31 when calculating the total portfolio returns. (It takes a while to collect final quarterly data for that stuff.)

The numbers also are before investment fees. In CalPERS’ case, fees reduced the gross return by 0.3 percentage point in the previous fiscal year.

CalPERS’ portfolio performed better than CalSTRS’ in part because CalPERS last year moved a small portion of the fund into commodities -- just in time to catch the latest big rally in raw materials, including crude oil. The "inflation-linked" portion of the fund’s portfolio, which includes commodities, soared 22.9% in the period measured.

By contrast, CalPERS lost an estimated 12% on its U.S. stock portfolio in the 12 months. CalSTRS’ U.S. stock portfolio lost 13.4%. The broad Russell 3,000 stock index fell 12.6% in the period.

How the funds fared with other assets:

--The teachers’ fund did better with its foreign stock holdings: It lost 5.8% on those issues compared with a 7.8% drop at CalPERS.

--Returns on bonds and other fixed-income investments came to 7.7% at CalPERS and 6.1% at CalSTRS.

--The funds continued to earn decent money on their real estate holdings, although CalSTRS fared much better in that sector, earning an estimated 11.8% in the period measured, compared with 8.1% for CalPERS.

--Private equity returns, such as from investments in firms taken private in leveraged buyouts, totaled 19.6% for the period measured at CalPERS and 11.6% at CalSTRS.

CalPERS said its overall portfolio loss "will have no immediate or significant impact, in and of itself, on California employers’ budgets next year or on the pension fund’s ability to pay benefits." That’s because the fund calculates the contributions it needs by smoothing portfolio returns over a 15-year period.

Measured over the last five years, the CalPERS fund's average annual return was 11.4%, well above the 7.75% it says it needs to earn to finance its promises to public workers. CalSTRS’ five-year annual average return was 11.5%, compared with its target of 8%.

For their own sakes, California taxpayers should hope the good times resume soon.

Teachers' pension fund rethinks whether to light up again

In politically correct society, teachers and cigarettes are a bad combo.

So the California State Teachers’ Retirement System should have known it would be courting brickbats by considering new investments in stocks of tobacco companies, after divesting itself of them in 2000.

The board of CalSTRS, as the pension fund is known, took up the question of tobacco-company investing at a meeting this afternoon, and then voted to continue the discussion later this year.

That was after the Sacramento Bee, in a story today, flagged the item on the board’s agenda, bringing an angry response from the American Lung Assn. of California and a more muted (but still negative) reaction from state Treasurer Bill Lockyer.

Tobacco stocks were ousted eight years ago from the portfolios of CalSTRS and from CalPERS, the California Public Employees’ Retirement System, under a policy that was only indirectly related to the horrors of lung cancer and emphysema: The issue was, would the companies be financially ruined by product-liability lawsuits?

They weren’t. Instead, an index of nine big tobacco stocks has racked up a 292% total return (price appreciation and dividends) since the end of 2000, compared with a mere 21% return for the Standard & Poor’s 500 index.

That would have meant some extra money for CalSTRS’ now $170-billion portfolio, and therefore a bit more retirement security for the state’s teachers. So the fund is reconsidering the tobacco-stock ban "based on fiduciary issues," spokeswoman Sherry Reser said.

Hooey, says the American Lung Assn. of California. Investing in the stocks would be "contrary to the state’s policy on reducing tobacco use," said Paul Knepprath, the association’s vice president of government relations. "There are other issues here besides the responsibility to make money for teachers’ retirement," he said.

Lockyer, too, took a swipe at the idea, saying he wanted more study as to whether "we can fulfill our legal duty to teachers without investing in products that kill."

Anyway, the ban applies to CalSTRS’ passive (indexed) stock portfolio. It doesn’t apply to about $20 billion of stock investments that are actively managed for CalSTRS by outside money managers. They can, and some do, continue to own tobacco stocks for the fund, Reser said.

CalPERS, so far, says it isn’t considering a policy change on smokes stocks.

Photo: Carolyn Kaster/Associated Press

Weekend reading: The investors' role in the oil price spike

If there's one issue in the commodities markets that can start a bar brawl, it's the question of whether investors and speculators are partly, mostly or not at all responsible for the run-up in raw materials prices -- particularly oil -- the last few years.

My weekend column in The Times jumps into the fray. You can read it here.

Based on how commodity-futures investment by pension funds etc. has mushroomed, and the strategy of many of these investors to be exclusively long, I don't see how anyone can argue that they've had no effect on prices.

No question that basic demand from actual commodity users, and tight supplies, lit the fire under prices. And yes, Peak Oil Theory is gaining more believers by the day. But does anyone really believe that the pile-on effect from investors and speculators isn't a meaningful factor in driving prices now -- as opposed to, say, 10 years ago, before the institutional-investor crowd caught the hard-asset bug?

All of the testimony from the Senate hearing I reference in the column can be viewed here. If the issue interests you, I think you'll find it all to be worthwhile reading.

Why CalPERS' portfolio chief is leaving to go green

The time is right for the green-investing movement, says Russell Read.

That’s why Read, who oversees the $242-billion portfolio of California’s huge state pension fund, is leaving that high-profile job to start his own business devoted to environmental and clean-tech investing, he told me today.

His plans aren’t fully formed, Read said. He isn’t sure if he’ll try to manage his own investment fund or build a business in some other way. Whatever the model, he said, he wants to help bring together what he views as now "disconnected efforts" worldwide to develop and implement the best green technologies.

"I might have the ability to play a major role in something that I think is of absolute paramount importance," he said by phone from a conference in New Orleans.

Read, 44 and a father of three, joined the Sacramento-based California Public Employees’ Retirement System as chief investment officer just two years ago. His decision to leave surprised CalPERS. Read said he hadn’t planned to depart this soon, but that events in the mushrooming green-investing industry overtook his own timing. "I didn’t anticipate [its] rapid development," he said.

Yet Read, who has a PhD in economics from Stanford University and who earned $958,000 at CalPERS last year, knows plenty about green investing. He has long been a private investor in Maine timberland and is involved in a hardwood reforestation project there. He has a deep knowledge of natural-resources industries.

What’s more, he has won kudos for his efforts to push CalPERS’ traditional stock-and-bond portfolio more toward so-called alternative investments that might generate higher returns in the long run. If they indeed pay off, the ventures would be good for the fund’s beneficiaries and for California taxpayers.

Those alternative investments include a 10-year, $600-million commitment to private-equity funds that are focused on investing in companies developing new energy sources, anti-pollution devices, recycling technologies and other green efforts.

"He knows who the players are" in the green-investing world, says Michael Rosen, head of pension consulting firm Angeles Investment Advisors in Santa Monica.

Which will, of course, help Read in his new business venture, whatever shape it takes.

Photo: Russell Read. Steve Yeater/Los Angeles Times

Posted April 23, 2008

CalPERS' investment chief jumping to green-investing biz

The giant CalPERS pension fund is losing its investment chief to the green movement.

In a surprise, Russell Read -- who has been principal investment officer of the California Public Employees’ Retirement System for just two years -- told the pension system’s board this week that he’s leaving June 30.

Read, 44, said in a letter to the board that he was quitting "to pursue my long-standing interest in environmental and clean-technology investing."

Pat Macht, a spokeswoman for CalPERS in Sacramento, confirmed that Read was leaving and said the move hadn’t been expected.

Read was attending a conference in New Orleans and wasn’t immediately available for comment. (UPDATE: Go here for an interview I did with Read this afternoon.)

Read has been pushing the $242-billion CalPERS fund -- the nation's largest public pension fund -- to shift a chunk of its assets away from stocks and bonds and into commodities, such as oil and timberlands, as well as into public-private partnerships that build infrastructure projects.

Anne Stausboll, assistant executive officer for investments at CalPERS, will take over as interim investment chief until the board finds a permanent successor, Macht said.

Read came to CalPERS from Deutsche Asset Management, where he was deputy chief investment officer.

Photo: Russell Read. Steve Yeater/Los Angeles Times

Posted April 23, 2008