CalPERS is used an example of investment strategies NOT to make, or in their words "its record over the past decade serves as a cautionary tale". First, the authors point out that pension funds have several advantages in having long investment horizons. Funds can ride out short term fluctuations, and can invest counter-cyclically (meaning they can buy when no one else is and hold for a long time). CalPERS threw away all those advantages and blew about $70 BILLION (that's with a 'B') in 2008-2009 going from $240B to $170B. Some of CalPERS' mistakes:
- Procyclical Investments: Instead of taking the long view and buying assets when they were cheap and waiting out the cycles, they bought when assets were expensive, following the crowd (procyclical). To make matters worse, instead of maintaining some cash to ride out the fluctuations they actually borrowed to make their investments, with their borrowing peak matching the bubble's peak. Then, when the asset prices dropped, they were forced to sell to pay those loans. This meant that they were borrowing to buy at the highs, and selling at the lows to cover what were effectively margin calls. You can't get stupider than this.
- Real Estate: Some people make money in real estate. Several large hedge funds even made $Billions betting correctly on the collapse of the real estate bubble in 2008. Not CalPERS. In true lemming-like follow-the-crowd fashion they increased their real estate investments at the very height of the bubble, raising their real estate investments from 5% in 2005 to over 9% in 2008. They didn't even make knowledgeable investments. They just gave $Billions to real estate companies which never made clear what they were doing. Those companies went bankrupt when the crash came.
- Corruption: CalPERS investments were pursued by agents who gave expensive wines, private airplane trips, and other favors to successfully win investments from CalPERS. Several are in jail now for that, but the damage has been done and $Billions are gone, to be made up by the taxpayers.
No sane person would want their investments handled by CalPERS. The continuing failure to meet the unrealistic assumptions of 7.75% they need to meet the pension fund's liabilities means that CalPERS will need cash infusions of many $Billions more from taxpayers at the state and local level. Sunnyvale can't afford it. The recent trends around California municipalities is to make CalPERS members share the losses equally with their employers (the taxpayers). Employees of the city of Sunnyvale can't afford this either. Sunnyvale needs to get out of CalPERS by amending the City Charter if necessary, get back on Social Security and establish a 401K for the good of their employees and the taxpayers of Sunnyvale.
"Investing for the Long Run" is by Columbia University professor Dr. Andrew Ang and Knut N. Kjaer. The paper is available on the Social Science Research Network as SSRN-id1958258. Mr. Kjaer started and managed the Norwegian Sovereign Wealth Fund bringing it from inception at $300M to $370B by the time he left.