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CalPERS Making It Impossible to Hire Competent Chief Investment Officer

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CalPERS Making It Impossible to Hire Competent Chief Investment Officer


CalPERS seems determined to dig its hole deeper. In early August, its Chief Investment Officer Ben Meng resigned abruptly after this site exposed him having made a billion dollar commitment to a Blackstone fund when he also owned shares in Blackstone. Even before Meng departed, both CalPERS employees and outsiders were questioning his competence; two former colleagues, who provided specifics, further claimed that Meng had misrepresented his investment experience. His errors, such as offering nonsensical justifications for cancelling a tail risk hedge right before it would have delivered a billion dollar payday, suggested the critics’ views were well-founded.

So here it is…..January….and CalPERS, despite saying hiring a new CIO was an urgent priority, has admitted it is nowhere.

Randy Diamond in the publication Chief Investment Officer revealed that CalPERS had been set to approve a CIO at a January board meeting, after two rounds of interviews, including finalist interviews. But now CalPERS spokesperson Wayne Davis is walking that back, saying it’s “unlikely” CalPERS will announce a new hire in January.

There are only three possibilities:

1. The CalPERS subcommittees didn’t like any of the candidates they have seen so far

2. The candidate to which CalPERS extended an offer turned CalPERS down, sending the giant pension fund back to square one

3. The first pick was suddenly disqualified, say based on a late in game discovery of a serious impropriety

Given the embarrassment of CalPERS having had to force out Chief Financial Officer Charles Asubonten over fabrications on his employment application, one would hope CalPERS and its search firm very carefully vetted the resumes and histories of any potential hires before they got to the interview stage, so #3 seems highly improbable.

So consider the implications of either #1 or #2. They say that CalPERS, despite offering the highest possible pay level for a public pension fund Chief Investment Officer, of $2.4 million, can’t get anyone who meets their specs. That says there is something wrong with their specs and/or that candidates, either from afar or when they get close, see CalPERS as such a mess that they aren’t interested at any price.

At this point, CalPERS and its search firm will have already gone through the most promising contenders. So it is faced either with trying to rationalize advancing someone it previously screened out, or trying to talk someone who wasn’t even willing to consider CalPERS into tossing their hat into the ring. But that runs the risk of having an offer rejected, particularly since there’s reason to think the more a capable investment professional interacts with CalPERS, the more he’d have reason to doubt he could succeed.

Not only is being the CIO at CalPERS not terribly attractive, but CalPERS has gone about making it even less so.

First the inherent reasons for CalPERS CIO role not being all that attractive, despite the big bucks:

Sacramento. It’s a provincial town.

Poor reputation of public pension funds. They are seen as dumb money. CalPERS was an exception in its heyday, but its glory years are now in the distant past.

Now the self-inflicted hiring wounds:

Insisting that the CIO meet an unreasonable 7% return target. To his credit, Diamond reminds his readers:

Whoever is chosen as CIO will have a clear mandate: earn CalPERS an expected return of at least 7% a year on annualized basis, despite a cloudy economic returns horizon for pension plans…

CalPERS’ own consultants have concluded that an annualized rate of rate of return of 6.2% is more likely over the next decade, though they have also determined that the pension can make the 7% return over a longer-term several decade period.

I have no idea what sexual favors were exchanged to get CalPERS’ consultants to come up with a handwave to pretend that a 7% return target is attainable. First, no one has any basis for forecasting what will happen more than ten years from now. Second, the US is a collapsing empire. Third, as time goes on, natural resource pressures and climate change effects will become more acute. The idea that prevailing risk-adjusted returns will be much higher more than ten years from now than they will be in the next ten years is pure delusion.

And more to the point, what matters to the incoming CIO is the next ten years. He needs to have some prospect of getting through that, assuming he’s young enough to have a more than ten year potential tenure as CIO.

Dictating the CIO’s strategy. Marcie Frost and the board are insisting that the incoming CIO continue certain policies launched by his predecessors, such as Meng’s plan to get into credit funds at a particularly unfavorable point in the credit cycle. None of these predecessors regularly beat CalPERS return target and hence there’s no reason to reheat their cooking.

And as someone considering the CalPERS job, why should I accept a daunting-verging-on-unreasonable target and then have my hands tied in how I go about achieving it?

Requiring the CIO to waste time on PR. Get a load of this:

CalPERS CEO Marcie Frost said she wants a CIO who is comfortable handling national media interviews, such as appearances on CNBC, and who has extensive investment knowledge.

“The CalPERS CIO holds a public job in the public spotlight, and all the candidates we’re talking with know that,” she said in a statement. “They also know that we’re focused on hiring an expert investor who can skillfully guide our global portfolio and help us deliver the retirement security our members have earned.”

Frost should be fired for having such backwards priorities for CalPERS’ most important post. Media skill shouldn’t be high on the list, let alone the first criterion. They CIO shouldn’t even be wasting his time on CNBC. How would that appearance even remotely help CalPERS beneficiaries and CalPERS beneficiaries? CNBC is for companies flogging their stocks, money manager trying to brand build (as in attract more funds) and analysts seeking to burnish their personal reputations, which helps their employers raise money or sell services. None of these are relevant for CalPERS.

If the CIO is doing a good job, the returns will speak for themselves. If the CIO is not doing a good job, no amount of media bafflegab will solve that problem. In fact, it will look defensive and real pros will laugh at the lame excuses.

Frost is likely so ignorant that she thinks the reason Meng lost out in his media campaign to defend his poor decision to exit the tail hedge was that his English isn’t so hot. No, it’s that Meng dug his hole deeper by demonstrating that he didn’t understand tail hedges and grotesquely misrepresented the costs of the Universa product in trying to justify his actions. It was that the more Meng spoke, the more he revealed that he didn’t know what he was talking about. That had zero to do with his TV polish and everything to do with his limited experience in running money.

Hostility to white male candidates. 93% of the heart surgeons in the US are men. If you needed a heart operation to survive, and the referrals you got were to the two top doctors in your area, and both were men, would you say, “Oh, no, I’ve heard about how horrible gender bias is in cardiothoracic surgery. I’m going to do something about it and go find myself a woman surgeon.” Really? Exactly how do you propose to find someone at least as good as the men you’ve rejected?

Yet CalPERS has done exactly that. We’ve heard that a superbly qualified candidate, a seasoned CIO who has run very large portfolios and has some knowledge of CalPERS, didn’t make it out of the first round and was treated with considerable hostility by a board member who has made it clear that she wants a woman, or failing that, a minority candidate. And she’s not the only board member to put out the “Men not welcome here” sign. From a year-end article in Private Equity International, Story of the year: Did they really say that?

CalPERS Making It Impossible to Hire Competent Chief Investment Officer 1

Investing is very much a men’s club. Even among endowments, which have much smaller assets under management than CalPERS, a recent survey found that for funds $1 billion and up, only 16% were female1 and that women CIO were typically being replaced by men. Data from larger money manager is more stale but indicated that over 90% of CIOs are men.

Now one could argue that CalPERS as a government body has an obligation to promote gender and racial equity. Fine. But “promoting” is not the same as “trying to fabricate from whole cloth”.

It would be entirely appropriate to require a CIO to be measured on fostering diversity among his staff, particularly senior managers, via hiring and training.

Working for Marcie Frost. The CalPERS CIO role formerly reported directly to the board. It was downgraded by having the CIO instead become the subordinate of the CEO, who is now the board’s only direct report.

To be blunt, why would a top investment professional want to work for Marcie Frost? She’s a clerk-typist promoted to well above her level of incompetence. She does not understand finance or even numbers. She can management buzz phrases together into sentences, not that those sentences actually make much sense.

That might still be fine if Frost were astute enough to leave her CIO alone. But she doesn’t. Frost has a reputation going back to Washington State, confirmed by current and recent CalPERS employees, of being a petty, abusive manager, who takes credit whether or not she deserves and scapegoats subordinates. Who needs that?

CalPERS best hope of getting a good CIO is to reconsider all those white men it rejected and even better, having the CIO again report directly to the board. But Frost and CalPERS, like Donald Trump, are too caught up in their own egos to get out of the way of their self-destructive impulses.


1 The text asserted 18% but then admitted that 2 of the women they’d included didn’t manage money.

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