CalPERS Shift to De-Risk Portfolio Post-Election Cost $900 Million in Potential Returns

The California Public Employees’ Retirement System (CalPERS) shifted away from equities in September, a move that cost the nation’s largest pension fund $900 million in potential returns as US stocks soared to new highs after the Novembr 8 election.

Ted Eliopoulos, chief investment officer of the $311 billion pension fund, said CalPERS changed its asset mix amid worries about valuations and potential volatility. CalPERS reduced its exposure to global equities to 46% of its portfolio, down from 51% previously.

During this week’s board meeting in Sacramento, Eliopoulos described the rebalancing as “a tactical decision to take some risk off the portfolio for an interim period of time.”

“Certainly, when the stock market rallies for a few months and you’ve taken some exposure to equities off the table, you’ll suffer some loss of return for that time period,” Eliopoulos said. “But what we have to remember is that there are other markets, and they tend to cycle in.”

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CalPERS moved to a less aggressive allocation last year, following two years of lower-than-expected returns. In addition to reducing exposure to global equities, CalPERS also cut its private equity mix to 8% of the portfolio, down from 10%.

CalPERS boosted its “liquidity” asset class, made up of short-term securities with maturities of less than 10 years, from 1% to 4% of the portfolio. And CalPERS increased its “inflation” category, which includes commodities and bonds linked to inflation, from 6% to 9%.

CalPERS board member Theresa Taylor urged Eliopoulos not to be too cautious in the pension plan’s asset mix.

But Richard Costigan, chairman of CalPERS’ finance and administration committee, said there’s no point in second-guessing the timing of the shift away from equities.

“We are trying to derisk because our beneficiaries are aging,” Costigan told Eliopoulos. “You’re under enormous pressure from the board to derisk the portfolio.”

CalPERS has been reining in its expected returns, and the fund is gradually lowering its discount rate from 7.5% last year to 7% by 2020. The pension fund will spend this year studying its asset mix and will determine next year what discount rate to use after 2020.

Meanwhile, CalPERS weighed in on the contentious Dakota Access Pipeline that would carry crude oil from North Dakota to Illinois. CalPERS joined 100 other investors asking major banks backing the 1,168-mile Dakota Access Pipeline to address the concerns of the Standing Rock Sioux Tribe.

The investors, which include four New York City pension funds, Boston Common Asset Management and Storebrand Asset Management, called on the banks “to protect the banks’ reputation, consumer base, and avoid legal liabilities.”

“Banks with financial ties to the Dakota Access Pipeline may be implicated in these controversies and may face long-term brand and reputational damage resulting from consumer boycotts and possible legal liability,” the investors said in a statement. “We call on the banks to address or support the tribe’s request for a reroute and utilize their influence as a project lender to reach a peaceful solution that is acceptable to all parties, including the tribe.”

By Jeff Ostrowski

A class action reform bill currently before Congress would be a serious setback for pension funds and institutional investors, and is possibly unconstitutional, according to legal scholars.

The “Fairness in Class Action Litigation Act of 2017,” (H.R. 985), which was introduced last week by Congressman Bob Goodlatte (R-Va.), seeks to maximize recoveries by victims, while eliminating unmeritorious claim.

“Class action lawsuits are rife with abuse,” said Lisa Rickard, president of the US Chamber of Commerce’s Institute for Legal Reform, which supports the bill. “The Fairness in Class Action Litigation Act will ensure that class members get paid first, and that lawyers only earn a percentage of what class members actually receive. It will also protect businesses from abusive lawsuits, and the economic damage that they cause.

However, there are some provisions in the bill that have raised serious Constitutional concerns by legal experts. Particularly damaging to pension funds and institutional investors is a conflict of interest provision that states:

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“A Federal court shall not issue an order granting certification of any class action in which any proposed class representative or named plaintiff is a relative of, is a present or former employee of, is a present or former client of (other than with respect to the class action), or has any contractual relationship with (other than with respect to the class action) class counsel.”

In other words, “no institutional investor could hire the same law firm more than once in a class action,” John Coffee Jr., director of Columbia Law School’s Center on Corporate Governance, told CIO. “It’s like saying you can’t see the same doctor twice.”

Since all the major pension funds have already used the major plaintiff law firms at least once, they would be cut off from their existing counsel, Coffee added. “That to me is invalid and is a major concern,” he said. “The committee should be shown that the attempt to say you can only use a lawyer once is probably unconstitutional.”

Elizabeth Chamblee Burch, a law professor at the University of Georgia who specializes in class actions and mass torts, also found problems with the conflict of interest provision in the bill.

“People naturally turn to those that they trust the most to prosecute their claims. Whether those previous relationships create disabling conflicts of interest is something that the courts already monitor,” said Burch in comments submitted to Congress. “Judges already test the relationship between class members and the named representative … as such, restricting a client’s freely chosen counsel is unnecessary.”

Another provision that could cause problems pensions and institutional investors is one that triggers an automatic appeal of class certification. This allows a defendant to automatically appeal any class certification against it, something almost every defendant would likely choose to do. Coffee says this automatic appeal provision could add a year or more to any class action litigation.

While Coffee did say he found some aspects of the bill to be “sensible and even desirable,” he believes the bill was intentionally written to be as broad and sweeping as possible “to try to shut down the existing economic arrangement between plaintiffs and law firms.”

Myriam Gilles, vice dean of Yeshiva University’s Benjamin N. Cardozo Law School, said in comments submitted to Congress that “the bill would radically restrict access to justice for injured consumers, employees and small businesses by, among other things, imposing requirements upon class plaintiffs that are both unrealistic and unnecessary.”

By Michael Katz