CalPERS Says No to Legislation Forcing It to Divest from Private Prisons

Investment officials of the California Public Employees’ Retirement System (CalPERS) are opposing state legislation that would require the pension plan to divest of its stock in private prison companies.

The opposition has broader implications. Agenda material for the system’s investment committee meeting on March 18 details that not only are the officials opposed to being forced to divest, they also likely don’t plan to voluntarily divest holdings in two American private prison companies, GEO Group and CoreCivic.

The two companies have been thrust into the spotlight because of President Trump’s immigrant crackdown. They have housed not only immigrants in their facilities, but entire families in two correctional facilities in the San Antonio, Texas, area—one run by GEO Group and the other by CoreCivic.

It’s doubtful that the CalPERS investment committee would choose to overrule investment officials. Investment committee members have generally been philosophically opposed to increasing divestments, which includes tobacco companies, companies that do business in Iran and Sudan, and thermal coal companies.

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The stance of CalPERS Chief Investment Officer Ben Meng and other system investment officials puts the largest US pension system at odds with some of its large peers, including the California State Teachers Retirement System (CalSTRS), the New York City Employees’ Retirement System, and the New York State Common Pension Fund, all which have divested from the two private prison companies.

The state legislation by Democratic Assemblyman Ron Bonta of Oakland requires CalPERS to divest of stock or bonds in private prison companies on or before July 1, 2020. CalSTRS is also included in the bill as being required to divest, but the system’s investment committee voted to sell its stock in the two prison companies in November 2018, making the issue moot.

The agenda material for the CalPERS March 18 investment committee meeting says that “as a California state agency, CalPERS is sensitive to public policy issues, but recognizes that our primary duty and obligation is to our members.

“Divestment almost invariably harms investment performance by compromising investment strategies and increasing transaction costs,” the agenda materials say.

It goes on to say that there is considerable evidence that divesting is an ineffective strategy for achieving social or political goals. “This is because the usual consequence is often a transfer of ownership of divested assets from one investor to another. Investors that divest lose their ability as shareowners to influence a company to act responsibly.”

CalPERS says in the agenda material that it owns approximately $10 million in stock in GEO Group and CoreCivic.

The pension system said it holds both companies in its passively managed stock portfolios that are designed to track their benchmarks with as little deviation as possible.

“Divestment represents an active deviation from our benchmarks that, in CalPERS’ experience, has harmed investment performance over time in most cases,” the agenda material says.

CalPERS general investment consultant, Wilshire Associates, has estimated that all CalPERS divestments from the first quarter of 2001 through June 30, 2018, have resulted in a 0.7% loss for the $351.1 billion pension system.

The pension plan also estimates that if it sold the private prison companies’ stock, it would lose $175,000, which reflects brokerage fees and the market impact of divesting from these companies and reinvesting in new securities.

CalPERS’s view of the financial damage it would incur from divestment sharply contrasts to the views of CalSTRS investment officials. Their review late last year said removing the private prison companies from the CalSTRS portfolio does “not pose a significant risk or benefit to the portfolio because they are so small relative to the US equity and fixed income allocations.”

CalSTRS had around $12 million invested in CoreCivic and GEO Group, $2 million more than CalPERS.

CalPERS had announced back in December that it was engaging the management of GEO Group and CoreCivic. The agenda material does not state the result of the engagement.

Bonta had told CIO that the bill he introduced in December came after the Trump administration’s policies earlier this year that resulted in the detention of thousands of children in two facilities run by GEO Group and CoreCivic.

“These companies are not only facilitating the Trump administration’s political agenda, but profiting from the cruel, zero-tolerance immigration policies that have torn innocent children from their families,” Bonta said. “This is inhumane and not in line with California’s values.”

CalPERS Would Be Forced to Divest from Private Prison Companies

CalSTRS Investment Committee Was Split on Private Prison Divestment

Tags: CalPERS, Corecivic, Divestment, GEO Group, prisons

The pricing gap between growth and value stocks is its widest in 70 years, an AB Bernstein study found, meaning today would be a great time to scoop up the cheapest shares—in anticipation of a reversal of their fortunes.

That time will come at some point, history suggests. And the dynamic of costly stocks getting more expensive and cheap ones getting cheaper is an opportunity to be exploited, the Bernstein study contended. Already this year, value has shown some evidence of a comeback.

“Value as a style tends to perform better than average when there have been extreme troughs in the earnings revisions balance series, particularly 6 to 12 months following the point of most aggressive downgrades,” wrote Bernstein’s Inigo Fraser-Jenkins. Numerous other studies have found that, over the long haul, value investors come out ahead because, once their overlooked gems get attention, the upside is the most lucrative.

There’s an argument that lately growth stocks, as embodied by the famous FAANG tech quintet, have been riding more on momentum than fundamentals. Earning downgrades, in particular regarding growth stocks, are rife these days for 2019’s first quarter. Earnings projections for the S&P 500 are down 6.5% in the year’s first two months, according to FactSet Research.

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“Although we think analyst estimates for 2019 and 2020 globally still have further to fall,” Fraser-Jenkins wrote, “the recent earnings season might have marked a low point in terms of the intensity of downgrades. We show value outperforms after such points.”

When earnings slowed in late 2018, the market suffered, and especially growth stocks. They’ve sprung back thus far this year, but the earnings expansion they feed on doesn’t appear to be there.

To Bernstein, examples of value stocks that have a lot of inherent strength, and thus potential to do well going forward, include General Motors, Bayer, and Credit Suisse. In the firm’s parlance, these stocks are “cheap per unit fundamentals.”

The last time value stocks were on top was from the end of the dot-com bubble at the start of the last decade until the 2008 financial crisis. Then, as the post-crash economy gradually gathered steam and the tech titans commanded the board, growth romped.

But as the old Wall Street adage goes: Trees don’t grow to the sky.

Tags: S&P 500, Stock Market, value stocks