CalPERS: Listen Up, This Is Long-Term Investing, People!

The California Public Employees' Retirement System, better known as CalPERS, is the nation's largest pension fund, with $234 billion under management. A 9% average annual investment return also makes it one of the most successful. Yet many vocal critics in the Golden State are advocating for the managers of the fund to be shown the door.

An editorial from Santa Rosa's Press Democrat titled "CalPERS Must Be Held Accountable" railed on the fund's recently announced fiscal 2012 performance:

CalPERS, the nation's largest public pension fund, reported an anemic 1 percent return on its investments, well short of its anticipated return for the year and a far cry from its rosy long-term projection of 7.5 percent a year. ... But there's another step that deserves more discussion than it's getting: Holding CalPERS accountable for its poor performance.

Meanwhile, a missive in the San Gabriel Valley Tribune blasted:

The financial managers of the California Public Employees' Retirement System who projected a 7.5 percent investment return but only saw the fund grow by 1 percent ought to be fired. When it's someone's job to grow a $234 billion fund and he or she can't even come close, it's time to find someone new.

Digging further into the story, I ended up, head in hands, sighing heavily and once again faced with exactly why so many investors end up getting steamrolled by the financial markets.

"Severe misunderstanding"
CalPERS wasn't about to sit back and take the media drubbing and offered a rebuttal from Deputy Executive Officer Robert Udall Glazier. For our purposes, Glazier's response can be summed up in these three bullet points:

  • "[Your editorial] demonstrates a severe misunderstanding of CalPERS' pension fund investment strategy."
  • "CalPERS is a long-term investor."
  • "If you look at our 30-year average [returns], we exceed 9 percent."

As I discussed in a column yesterday, as humans, we have the woeful tendency to try to find patterns where none exist. That might mean thinking that we can spot a "hot" slot machine about to pay off big. Or it might mean believing we can predict when a falling stock is about to "bounce."

It might also lead us to think that one-year investment returns are suddenly a trend that will stretch out far into the future.

The firestorm over the past year's returns for CalPERS is a sad reminder of why so many people have trouble managing their investments. In CalPERS, California has a pension fund that has performed very well over a very long period of time. Yet a 1% return from the most recent fiscal year appears reason enough for residents to want to take a hatchet to the fund's management.

We could similarly imagine individual investors destroying their own personal portfolios by constantly abandoning their investments in favor of the hot new sector -- Internet stocks, anyone?

Interestingly, had CalPERS not responded, readers probably wouldn't have known that the fund returned 21.7% just last year. I dare say the calls for heads to roll weren't as loud then. Readers probably also wouldn't have known that the fund has beaten its long-term return goal "in significant excess" (Glazier's words) in 13 of the past 19 years. Nor would they have known that both the 20-year and 30-year average annual return from the fund are ahead of target.

To be sure, it's been more challenging in recent years. Not surprisingly, the fund, just like nearly everybody else, took a hit in 2008 and 2009. Over the past decade, the fund's total return has been 5.4% per year, while its U.S. stock investments have averaged 3.6% per year. Notably, the Dow Jones (INDEX: ^DJI  ) managed just 1.7% per year over the same stretch.

However, in sage words that every investor should heed, Glazier quoted CalPERS' chief investment officer as saying: "The key to having a strategy is working with it. The worst mistake is to abandon the strategy when it appears to have some trouble."

The sad truth
Will the people of California be convinced? I doubt it. Human nature and the preprogrammed quirks of the brain are tough to overcome. If they weren't, investing would be a piece of cake.

For my part, I'm just glad that I don't have to deal with the already-significant challenge of investing being further complicated by outside forces that think about investing in exactly the wrong ways. Sorry, CalPERS.

Of course, for those of us who get to watch the CalPERS drama from the sidelines, the fund, just like any major mutual fund or hedge fund, has to disclose its portfolio in SEC filings. So what do the managers at the country's leading pension fund think are the right stocks to own right now? Tech and energy appear key as four of its top five holdings are ExxonMobil, Microsoft (Nasdaq: MSFT  ) , IBM (NYSE: IBM  ) , and Chevron.

As far as stocks that the fund has recently been buying, it added more than 700,000 shares of Microsoft between the fourth quarter of last year and the first quarter of this year. It also made notable increases to its holdings of both Wells Fargo (NYSE: WFC  ) and JPMorgan Chase.

The fund's largest holding, though -- a $1.5 billion investment -- and a stock that it continued to buy during the first quarter is a home-state favorite: Apple (Nasdaq: AAPL  ) . Apple also happens to be a stock that was recently the subject of a focus report from Motley Fool tech expert Eric Bleeker. To find out what the key opportunities are for Apple, as well as three reasons you should consider buying the stock, check out this must-read premium report.

The Motley Fool owns shares of ExxonMobil, Microsoft, International Business Machines, Apple, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Wells Fargo, Chevron, Microsoft, and Apple. Motley Fool newsletter services have recommended creating bull call spread positions in Microsoft and Apple, and creating a synthetic long position in International Business Machines. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Microsoft and Chevron, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On July 25, 2012, at 5:19 PM, corpgov wrote:

    Great post. Hopefully, California taxpayers won't be snookered by the headlines. Unfortunately, like most investors, most voters are chasing after the last quarters stars instead of taking a long-term perspective.

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