CalPERS seems willing to do whatever it takes to spin a positive story, even if it means cooking its results. In its May board meeting, one of the topics is the giant pension fund’s cost effectiveness. Staff appears wedded to the need to tell a tale of continuous improvement regardless of what is actually taking place. This year, as we’ll discussed, CalPERS has engaged in a particularly clumsy and misleading bit of misrepresentation to try to buffer its image, that of omitting some charges it has always included. But first we’ll give some background on why this entire exercise is misleading.
Mind you, we agree with the general proposition that reducing investment costs is desirable. But CalPERS prefers to snooker its audiences rather than show that it isn’t in control of some of the biggest cost drivers. The logical approach would be to separate costs that staff controls versus ones it does not influence much or at all, yet CalPERS prefers to obfuscate.
How CalPERS Has Been Misleading the Public on Its Investment Costs
Keep in mind that far and away the biggest source of investment costs is private equity fees and costs. Oxford professor Ludovic Phallipou has estimated that they are a staggering 7% per year. CalPERS not only does not dispute that figure, it even used it (without citing Phalippou) in a 2015 private equity workshop.
The magnitude of private equity fees relative to all of CalPERS’s investment categories poses lots of problems in terms of CalPERS’ efforts to tell a pretty, as in pretty impossible, story to its constituencies. As CalPERS staff has repeatedly pointed out, it doesn’t have very good control over how much it has invested in private equity due to the fact that general partners control the timing of capital calls and distributions. On top of that, fundraising is cyclical, so CalPERS has had years (like right after the crisis) when it was not committing much to new private equity funds. That matters because funds charge higher management fees in the “investment period,” typically the first five years, than later on. General partners are also able to set fee levels higher in bull periods. So the level of fees that CalPERS incurs in private equity is to a significant degree determined by factors outside staff’s control. Thus touting the absolute level of fees is misleading.
And that’s before you get to the fact that CalPERS refuses to include private equity carry fees in these computations. Anyone who has employees that are eligible for incentive bonuses would look treat you as crazy if you tried telling them that bonuses weren’t part of their costs. Yet that is precisely the position CalPERS takes.
The 2017 Con: Just Throw Out a Significant Cost
Today’s Where’s Waldo exercise is to compare the 2016 slide on cost effectiveness trends in CalPERS’ annual Cost Effectiveness presentation with the one from 2017. The 2016 slide comes first:
It was probably unfair to ask you to look at itty bitty type, which naturally is where the lie is hidden.
Don’t forget goals in this presentation, or ILPA