Friday Letter: CalPERS’ AIM programme soars amid turmoil

Good performance cures all, some market participants say.

In the case of the California Public Employees’ Retirement System (CalPERS), one of the world’s biggest private equity investors, it should certainly help boost internal morale and external perception. The $237 billion system has taken a tremendous public beating over the past year for alleged ethical lapses by some of its former investment professionals.

Enquiries into improper disclosures on gifts and meals from fund managers have recently captured headlines, but the crux of the problems at CalPERS have had to do with an environment that tolerated questionable relationships. Those notably included former pension board members going on to work for private investment and advisory firms and then soliciting CalPERS commitments.

The pension has in the past year or so implemented a number of measures to restore credibility and boost risk management and governance – most of which the private equity industry, including this publication, has largely commended. The various initiatives, however, haven’t exactly soothed a wary public that routinely has trouble understanding things like why CalPERS’ CIO brings home a salary larger than the state’s governor, or why the pension racked up a reported $11 million legal bill for an internal review that investigated allegations of influence peddling and the fees it pays external managers.

It is easy, in California’s highly politicised environment, for the public and politicians to latch onto such headline-grabbing figures and forget that CalPERS’ private equity investment team has dedicated itself to finding alpha to fund the pensions of state employees. But that point was perhaps made clearer this week with some other headline figures: CalPERS’ preliminary results for fiscal 2011 showed its Alternative Investment Management (AIM) programme helped to drive the best returns at the pension system in 14 years.

CalPERS’ AIM programme was expected to produce a 25.3 percent return for the year. That followed the stellar 30.9 percent return for fiscal 2010.

With the kind of performance that’s been recorded over the past two years, which has helped to mitigate the severe losses it suffered in the wake of the global financial crisis, the pension’s AIM staff deserves some serious applause.

The successful returns come as CalPERS continues to fill high-level vacancies in the wake of scandal. Réal Désrochers, the former head of private equity at the California State Teachers’ Retirement System, joined in May as the AIM programme’s senior investment officer. The spot had been vacant since Leon Shahinian was suspended last year. The pension has yet to replace former AIM programme senior executive Joncarlo Mark, who resigned in March.

Industry observers believe Désrochers has a big task on his hands revamping the programme, its procedures and culture in line with new rules and standards governing conflicts of interest among investment firms, placement agents, board members, politicians and former employees.  The pension is still under investigation by several state watchdog authorities and the system likely has some more challenges ahead.

Still, the fact remains that CalPERS’ private equity portfolio is a strong performer – and that isn’t simply due to luck. Its investment staff has clearly positioned the pension well for future returns, a fact which should produce a good amount of pride both within the pension itself and among its many thousands of beneficiaries.