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November 11, 2010
CalPERS Proposes Changes to Focus List Methodology
    by Robert Kropp

The pension fund's Investment Office recommends engagement with companies in which it has the largest ownership stake, and the inclusion of one-year stock returns in its selection process.


Since 1987, California Public Employees' Retirement System (CalPERS), whose $209 billion in market assets makes it the largest public pension fund in the US, has "publicly named 142 companies to its annual Focus List based on underperformance in share value compared with industry peers, returns on investment and corporate governance practices," according to the fund.

In its 2010 study entitled
The CalPERS Effect on Targeted Company Share Prices, Wilshire Associates, an investment consulting and services firm, found that the total returns for companies in the five years preceding involvement by CalPERS averaged 83% below their benchmarks.

For the five years after CalPERS first engaged with companies on its Focus List, those same companies averaged 12.7% above their benchmarks. However, "Past reports indicated that CalPERS' involvement had a significant positive impact," with excess returns as high as 54% in 1995, Wilshire found. "The data presented in this report suggests a more subdued effect" in recent years.

In advance of the November 15 meeting of the pension fund's Investment Committee, its Investment Office has proposed a number of changes to the methodology of the Focus List. In its
review, the Investment Office has recommended that the Focus List include "companies where CalPERS has a larger ownership position by altering the selection universe from index based to ownership based." Instead of a screening universe of Russell 1000 companies, CalPERS should focus its engagement on the 500 companies in which it has the largest holdings, the review advised.

Further recommendations include adding one-year total stock returns to the existing three- and five-year returns, while retaining an emphasis on the longer horizon. The Investment Office also recommended that an initial screening should emphasize underperformance by focusing exclusively on financial returns, instead of the current practice of including corporate governance factors. A secondary screening "should include additional criteria such as engagement obstacles and opportunities, market expectations, deeper financial analysis, and environmental, social, and governance factors."

The Investment Office also recommended that CalPERS "work to develop relationships with other investors."

The Investment Office justified its recommendations by observing that despite severe losses to the portfolios of financial institutions, none were identified by current program methodology. Furthermore, according to the review, Wilshire "found that over the last ten years, privately engaged companies significantly outperformed those companies named to the public Focus List for the one, three, and five years after CalPERS made initial contact."

The goals of CalPERS' strategic plan are to manage the risk and volatility of assets and liabilities, and to achieve long-term, sustainable, risk-adjusted returns.

 

 
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