Major Restructuring of CalPERS Investment Committee Could Become a Reality

A plan to restructure the investment committee of the California Public Employees’ Retirement System (CalPERS) would remove as many as six of the current 13 members and more than cut in half the 11 annual meetings.

The plan is scheduled to be discussed today at the CalPERS governance committee meeting and comes as the result of a year-long governance project.

Currently, the CalPERS board and investment committee are the same 13 members, and most months they meet one day as investment committee members and another as board members. It is the only CalPERS committee that all board members sit on. Most other committees, such as the governance committee, have seven members.

CalPERS Board President Henry Jones told CIO that the plan is aimed at improving the governance processes of the board and investment committee, with the ultimate goal to enhance the investment program at the nation’s largest pension system.

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“We want to be more effective,” he said.

At least one board member, Margaret Brown, objects to the plan. She maintains that the proposal in part is an effort to remove her from the investment committee. Brown was elected to the CalPERS board two years ago.

She says the plan is also aimed at former board member J.J. Jelincic, who is running in an election against Jones to rejoin the board. If Jelincic wins, the new board president could deny Jelincic a seat on the investment committee.

“CalPERS doesn’t want dissent,” said Brown, who on occasion has been at odds with fellow investment committee members on the pension plan’s investment policies.

Jelincic, in a separate interview, said he did not know if the restructuring was part of an effort to deny him a seat on the investment committee. He said he had other concerns: that the investment staff with fewer meetings could do what they want in terms of making investments with less oversight.

“You will have less supervision than they have now, which is what the investment staff wants,” Jelincic said.

More than 40% of CalPERS’s $350 billion-dollar plus portfolio is internally managed, plus the investment staff hires dozens of outside investment managers. Much of the investment activity takes place without the approval of the investment committee, since the CalPERS investment staff has wide latitude to make investments, up to $2 billion in many cases, without investment committee approval.

In addition to being a long-term board member until he decided not to run for reelection in 2017, Jelincic had worked for CalPERS as an investment staffer in the pension plan’s real estate asset class.

The new plan would restructure the investment committee to make it similar in size to other CalPERS committees, though the CalPERS board would still have final approval of investment committee matters.

The plan also has investment committee meetings reduced to quarterly, with one yearly retreat meeting. Currently, the system has nine monthly voting meetings for the investment committee. It also has two board retreat meetings, in which votes are not normally taken.

A yearly stakeholder meeting would also be added to the meeting schedule where, for example, CalPERS board members would discuss the pension system’s views on climate change issues related to investments.

Additional investment committee meetings would be added as needed.

The restructuring plan began a year ago following a board member survey and individual meetings with board members on how the board and investment committee could function better, Jones said.

He refused to elaborate further, saying he wanted to make his comments at the governance committee meeting, not in the press.

At a CalPERS retreat meeting on July 17, Cari M. Dominguez, a corporate governance expert who is a faculty member at the National Association of Corporate Directors, said relative to corporations, typically a committee is a subset of the board. She said a third of the board members would be on a committee and those individuals would be assigned based on their expertise with a particular subject matter.

Dominguez did not narrow down her remarks to pension plan governance.

Sacramento-based CalPERS’s neighbor, the California State Teachers’ Retirement System (CalSTRS), also has all of its board members serve on the investment committee. CalSTRS does, however, have fewer investment committee meetings than CalPERS, usually holding such meetings once every two months.

CalPERS staffer Anne Simpson, who has been assigned by CalPERS Chief Executive Officer Marcie Frost to work on the board reorganization program, said the investment committee revisions could result in a streamlined process. She questioned at the July 17 meeting whether the investment committee was able to adequately review the 511 separate items of information that have been given to them as committee members in the last two years.

Simpson suggested fewer meetings and fewer members, along with the use of informational technology tools, could better help investment committee members sort through investment material.

She said the structure would allow investment committee members to take “deeper dives” into investment committee topics. She said the current structure, in which all 13 board members are investment committee members, is “our jumbo shrimp.”

She cited CalPERS Chief Investment Officer Ben Meng, who had previously told the investment committee that a 30-day cycle of reporting by the investment staff to the investment committee for monthly meetings “was very short-term.”

Meng, who joined CalPERS in January, has stressed repeatedly that CalPERS needs to behave like a long-term investor.

Brown said restructuring would result in the remaining investment committee members not being able to do their job.

“There is no way we could do our fiduciary duty in maybe four, five, or six meeting a year,” she said. Brown said investment staff would either “give us less information or bury us with information,” so staff could make investments with less scrutiny.

In a separate matter, on Monday, Brown demanded that CalPERS make public the results of an internal investigation examining whether board members are leaking confidential closed-door session information to the press. She also denied she is responsible for releasing the information.

The board governance committee today is also expected to vote on a code of conduct for board members. One area of discussion is expected to be what penalties should be imposed on CalPERS board members who violate the code of ethics.

Brown has called the code too vague and says it could be used to target her and other board members who speak out.

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Tags: CalPERS, Governance, J.J. Jelincic, Pension, Restructure

New Mexico Educational Retirement Board (ERB) Chief Investment Officer Bob Jacksha may have beaten his peers this fiscal year with 7.29% returns, but that doesn’t mean he’ll sleep any easier in this economic climate.

“In terms of concerns, let me quote the Mad Magazine character, Alfred E. Neuman: ‘What, me worry?’…The answer is ‘yes, I do,’” he told CIO.

Jacksha is particularly concerned about the ongoing tariffs and trade war between the US and China, which he calls “potentially ruinous.” He cited the almost instantaneous stock market volatility the actions of President Donald Trump and President Xi Jinping have created, not to mention that Trump has threatened allies such as France with trade sanctions.

“While I disagree with the method, I have some sympathy for the general thesis of equalizing trade terms,” said Jacksha. He added that the world may have benefited in the long run from the US being at a disadvantage when it was the dominant economy in a post- World War II era. But, he went on, America “should strive for more equal terms of trade” now that the global economy has caught up.

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And although there are issues with China that must be addressed, such as intellectual property protection and letting outsiders into their markets, Jacksha’s biggest US policy disagreement is with the Trump administration’s hard-charging approach.

“Instead of engaging with our long-term allies to press China to behave, we are going it alone and using tariffs as the main weapon, while threatening our allies with the same,” he said. “A more conciliatory, participative approach would seem to be more productive, but that is not, unfortunately the modus operandi for our current Washington administration.”

Jacksha is also wary of “broader worries” about China as a rising power “coming into conflict with the established superpower, the United States; i.e. ‘The Thucydides Trap.’” That’s where the faceoff actually leads to war.

The New Mexico ERB chief is not as concerned with the Federal Reserve making a policy mistake, but instead that its actions will cease to be effective in offsetting potential trade escalations.

“We are doing our best to build a robust portfolio that will do reasonably well in a variety of market environments and to have a plan to take advantage of a recovery in the event of a serious downturn,” Jacksha said of risk prevention. “What we do know is that markets will go down….and they will go up. Just not how much, when, or in what order.”

Jacksha’s Secret Weapon

An area that the $13.3 billion fund has shown to mitigate these risks in by diversifying its assets is alternatives. The fund allocates 41.8% to the space, significantly higher than many of its peers, who typically keep around 15% to 25% of portfolios invested in alts (the rest of New Mexico portfolio is 31.3% equities, 25.9% fixed income, and 1% cash).

That high allocation was also the driver behind the retirement board’s benchmark-beating returns, especially in a year where institutions are starting to realize lower or negative returns than recent years. Its top-ranking private real estate program, for example, returned 12.7% for the year ended June 30.

“We have done our best to build a portfolio of diversified risk exposures that will do relatively well in a variety or market outcomes. I say “relatively” because you can’t construct those risk exposures to do really well in up markets and still produce large positive returns in a downturn,” said Jacksha, confirming alternatives as “a main part” of the fund’s anti-downturn strategy. “We feel we are reasonably well-positioned should a downturn take place, but would prefer it doesn’t, of course!”

Power 100: Bob Jacksha, CIO, New Mexico Educational Retirement Board

Bob Jacksha’s Return Strategy

Tags: Alternatives, Bob Jacksha, China, New Mexico Educational Retirement Board, Pension, Trade War