CalPERS Trumpets 16.7% Return for the Year

The California Public Employees’ Retirement System, which has been criticized for pushing a political agenda instead of focusing on generating returns, said Tuesday that its investments gained 16.7% in its latest fiscal year.

The nation’s largest pension fund said its return for the year ended June 30 beat the benchmark 15.2% set by its board. Wilshire Associates, CalPERS’ Santa Monica-based investment advisor, said public pension funds with assets of more than $1 billion had a median gain of 15.9%.

“This is great news for both our employers and our beneficiaries,” CalPERS Chief Investment Officer Mark Anson said in a conference call with reporters. “The fund pretty much hit on all cylinders.”

In the fiscal year that ended June 2003, the pension giant’s investments posted a 3.9% return. CalPERS’ portfolio includes U.S. and international stocks and bonds, as well as real estate and venture capital investments.

In the latest fiscal year, CalPERS said its U.S. stock investments returned 20.8%, topping the 20.5% gain of the broad Wilshire 2,500 stock index.

The $166-billion pension fund’s best returns came from the $2.2 billion it invested in so-called corporate governance funds, which surged 53.5%. Governance funds run by firms such as San Diego’s Relational Investors use shareholder activism to work with corporate managements to improve performance and generate higher returns.

That gain vindicated CalPERS’ activist shareholder philosophy, Anson said. “We fully believe that good governance leads to good returns, and the proof is in the pudding.”

CalPERS’ showing didn’t quiet critics who have complained about its political activism, saying it should be concentrating solely on generating investment returns for its 1.4 million members.

“It strikes me that while CalPERS is patting itself on the back, it is ignoring the fact that taxpayers are picking up the tab for a $2.6-billion investment deficit this year,” said Karen Hanretty, spokeswoman for the California Republican Party in Sacramento, referring to the amount the state is expected to chip in this year to ensure that CalPERS can meet its pension obligations.

“They’ve been underperforming for years, and they still have a lot of catching up to do.”

State Sen. Tom McClintock (R-Thousand Oaks) noted that the Dow Jones industrial average gained 16.1% in the same period and the Nasdaq composite index rose 26.2%, not including dividends.

“The fact that they are turning in returns almost indistinguishable from the Dow and dramatically less than the Nasdaq adds a certain perspective,” McClintock said, “and frankly, I’m not impressed.”

Though CalPERS fared well against its own and Wilshire’s benchmarks, its performance trailed that of the California State Teachers’ Retirement System. CalSTRS, the third-largest U.S. pension fund, reported earning 17.4% for the year.

In recent months, the Business Roundtable and the U.S. Chamber of Commerce have slammed CalPERS, saying it promoted a pro-union agenda in its governance initiatives aimed at companies such as Safeway Inc. CalPERS and other pension funds sought the ouster of Chief Executive Steven Burd.

In May, the Wall Street Journal said in an editorial that CalPERS took governance reform “to absurd new lengths” when it withheld support for billionaire Warren E. Buffett as a director of Coca-Cola Co. because of a potential conflict of interest.

This year CalPERS voted against 79% of auditors and 24% of directors at the 2,700 U.S. companies in which it holds stakes, spokesman Brad Pacheco said. At a recent retreat in Lake Tahoe, the CalPERS board discussed softening its governance stance but took no action.

The state and local governments that contribute to CalPERS have had to pay more in recent years, in part to make up for the drastically lower returns CalPERS suffered during the recent bear market.

CalPERS said its investment gain of $22.7 billion in 2003-04 “should provide hope” that taxpayers will get a break in future years, but 2004-05 contribution levels have already been set.

Anson was noncommittal when asked whether contributions could be lowered starting in 2005-06, saying, “That’s a decision further down the road.”