CalPERS Needs A New Masterplan

CalPERS’ performance took a nose-dive into negative territory in 2018. The $348.7 billion and largest public pension fund in the U.S. supporting the health and retirement benefits of California’s Public Employees earned -3.9% in the year, 6.3% for the three years, and 5.1% for the five years ended Dec. 31, with a ten-year performance at 7.9%, as reported by Pensions & Investments.


On the surface, the 1-year performance of a pension fund designed to produce returns of a multi-generational trajectory of long may lead you to think is like evaluating the future of GE based on quarterly earnings reports. Appearing as a somewhat nebulous indicator, or consequence, when not significantly impacting the three, five, and ten-year performance characteristics.

You think. Except that a commercial company like GE can open new lines of business that require it to make significant investments impacting the bottom line significantly and affecting the cause of why the one-year consequence looks dire. In contrast, CalPERS’ performance, void of any discernable directive to affect cause, is solely confined to a heap of complex consequential outcomes affecting its returns.

In Search of Causation

Indeed, the performance of CalPERS depends mainly on financial instruments. It cannot affect the outcome. The reason I called asset management, looking from the outside seven years ago, a musical chair game of me-too risk escapism.

CalPERS allocates

  • 48.8% to a horse race of public equities,
  • 22.5% to the issuance of loans with repayments identified as global “fixed” income,
  • 10.8% to stale objects, things you can touch, like real estate and precious metals, defined as tangible assets,
  • 7.7% to revitalizing stumbling companies with private equity, including a tiny opportunistic yet conflicting grab-bag of venture capital,
  • 5.9% to inflation-sensitive commodities and bonds.

The problem with traditional asset management, as you can witness from the assets above, is its reactive rather than proactive nature that puts inevitable pressure on the unfunded liability that may lead CalPERS to modify member and employee contributions, and eventually, when push leads to shoving, as guaranteed by California law, have the State pick up the tab (it has happened already). The bill ultimately relayed to every single taxpayer in California.


CalPERS continually analyzes the individual asset classes’ performance, a process not publicly disclosed. With board approval, it adjusts the dials of asset-class allocations to tune the total fund performance. Allocation escapism from an underperforming asset class may lead to a redistribution of assets towards a better-performing asset class, with asset diversification, in essence, turned into a hedge (of long).

The problem with the downstream optimization of existing consequences is that they inevitably run out of steam, as the returns indicate. However, one ought not merely to assume the negative returns produced by CalPERS in 2018 are happening due to impaired judgment of how to hedge bets, for any bet not directly derived from a cause is bound to yield an invalid inference.

As we learned in school, correlation is no undeniable proof of causation, if you catch my drift. In the same way, a bad report card of a child cannot unequivocally be traced back to, say, laziness. Instead, it may have been the difficulty of the material; the study was not explained very well; the teacher was just wrong; the child went through a bitter divorce, etc.


An ounce of prevention is worth a pound of cure.

In this context, CalPERS must move from a passive and reactive investor, using 80-year-old dead-beat asset classifications wholly disassociated from its inherent risk with endless bottom-heavy diversification to becoming an active and proactive investor investing in the access to a massive greenfield of humanitarian need (rather than an unsustainable vile-maxim of human want).

Indeed, pension funds such as CalPERS can play a pivotal role in the ever-expanding fractal of humanity and allow its members to benefit from such expansion.

CalPERS must become a strategic investor in control of its future and move away from the endless financial engineering and downstream suboptimization of an existing norm in asset management towards an upstream realization of a new norm that promotes a brave new and renewable world for us all.

I cannot wait to have another talk with CalPERS soon to educate and help them facilitate the plan for such a transition.

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