Calpers To Go All In On Risk

I don’t see any reason that this shouldn’t work out well.

Calpers, the giant California pension fund, is planning to make up some rather substantial losses by increasing its portfolio allocation to the investment sectors that were chiefly responsible for the losses. Got that?

From the NYT:

The fund, known as Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall. Meanwhile, local governments in the state are pleading poverty and saying they cannot make the contributions that would be needed to shore it up.

Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

OK, to give the guy his due, it’s not entirely crazy to put some money into really beaten down sectors. The economy will recover in some manner and there probably is an upside to them given the depressed prices that they now command.

Still, it seems like a bet on the world returning to the status quo ante. Instead of hoping for a home run maybe they should think about restructuring their gold-plated pension plans to cut their future liability. Then the numbers would let them buy boring things like Treasuries and high quality equities.

But I forget, this is California and they always rise from the ashes, don’t they?

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