Dear also restructured the fund’s private-equity unit, reducing the number of external managers while pushing for lower fees and better terms. From fiscal 2006 through 2008, Calpers committed $36.7 billion to external private equity managers; from fiscal 2009 through 2012, that fell to $5.2 billion, according to figures the fund provided. Private equity was up 12 percent for the year as of Dec. 31, about half its benchmark.
“It takes a long time for a private-equity portfolio to reflect decisions to improve it,” Dear said. “What I found was a portfolio with too many general partners and too many funds. That was a problem from a portfolio-management standpoint, but more importantly it dragged the portfolio toward the average.”
“To obtain the return premium we expect from private equity, the plus 3 percentage points, you really have got to have the largest proportion of your assets with the best managers,” he said. “Private equity is the case in point that taking a short-term view is like pulling up a carrot to see how it’s growing.”
While the fund targets a 7.5 percent annual return, it spreads gains and losses over 15 years to reduce the volatility in the amount it asks taxpayers to provide through employer contributions for pension benefits.
Four Times
The state and local governments paid $7.8 billion to the fund in the last fiscal year to cover the cost of those benefits, almost four times more than a decade earlier.
Calpers and other public pensions have come under fire for assuming unrealistically high rates of return on invested assets. The rate can mask how much is really needed to cover benefits promised to government workers. A lower figure would require more from taxpayers to cover the costs.
Governor Jerry Brown, a Democrat, and lawmakers last year enacted a package of bills that caps pension benefits for public workers and requires new employees to pay for half of their pension costs. The same savings will be sought from current employees through bargaining with their unions to lower projected obligations as much as $55 billion over 30 years.
“It is encouraging to see improvement in Calpers returns for the 2012 calendar year, which signals a better second half of the year for the pension fund,” said state Senator Mimi Walters, a Republican from Irvine who is vice-chair of the Public Employment and Retirement Committee. “However, I wouldn’t call a modest improvement a resurgence.”
“The massive losses the fund has experienced over the last five years will take more than one 13 percent annual increase to be considered a resurgence,” she said.