Copyright 2004, New York Times

Calpers Tells What It Paid High-Risk Investment Funds

(New York Times 12/8/04) -- The nation's largest pension fund disclosed for the first time yesterday how much it paid the venture capitalists, hedge fund managers and others who handle its riskiest specialized investments, and how well those investments performed in recent years.

The information, which had been secret, was released by the California Public Employees' Retirement System, or Calpers, to settle a lawsuit by the California First Amendment Coalition, a small nonprofit group that had argued that the public was entitled to the pension data.

The disclosure is expected to intensify a growing debate about whether pension funds for government employees are investing the more than $3 trillion at their disposal in ways that will produce the best results, both for retirees and the taxpayers.

The preliminary data issued yesterday showed that Calpers had been paying about $200 million a year to 415 private investment firms that managed the $13.5 billion it has put into the riskiest assets, known as alternative investments - often equity stakes in companies that are not publicly traded. Calpers has committed $21.1 billion, but not all that money has yet been invested.

The charges work out to 1.48 percent of its assets under management, considerably higher than the 0.67 percent that money managers typically charge for investing in a stock mutual fund, according to data compiled by Morningstar. But individual investors and mutual funds cannot generally invest in the type of assets Calpers is using because these are open only to "accredited investors," who can afford big losses.

Riskier assets tend to generate larger returns over time than conservative ones. But in any single year, such assets can also produce big losses. That has prompted some analysts to question whether the alternative investments are appropriate for government pension funds, which must fall back on the taxpayers if they get into trouble. Nor are alternative investors required to make the extensive public disclosures that publicly traded companies are. Earlier, Calpers issued only cumulative returns for such investments and the total fees.

Peter Scheer, executive director of the First Amendment Coalition, said the new data suggested that Calpers was not getting particularly good returns. He said his initial review of the data suggested that Calpers's alternative investments were returning 10 percent to 11 percent a year, "which is about what you make, I'm told, over time on an index fund."

Mr. Scheer also said that the information would help settle longstanding questions about whether some investment partnerships were favored because they had cultivated relationships with politicians and celebrities. A family of private investment partnerships created by the Yucaipa Companies, for instance, sometimes sponsors appearances by former President Bill Clinton at conferences for pension trustees.

The new data show that Calpers paid fees around $8.6 million to three Yucaipa investment partnerships in 2003. The return from those partnerships was zero.

A Calpers spokeswoman said that private investment partnerships typically involved commitments lasting many years, and that it would be misleading to look at the last few years of performance data and conclude that the alternative investments were poor performers.

The spokeswoman, Patricia K. Macht, said the funds tend to have losses in their early years and then produce big gains. "It's an unfinished story," she said.

The data showed that Calpers's biggest fees in recent years were being paid to Lombard/Pacific Partners, which invests in Asian ventures. Calpers paid Lombard/Pacific $11.6 million in 2001 and again in 2002. In 2003, it paid $8.1 million, its largest fee that year.

A Lombard spokeswoman declined to comment last night.

Until recently, many public pension funds were barred from investing in hedge funds, venture capital or similarly risky assets. But little by little, prohibitions by states have been removed.

Pension funds that invest in such assets argue that the potential for higher returns is worth the risk, because if successful, the investments will save the taxpayers money. In the last three years, alternative investments have become even more popular, as pension funds sought ways to recoup stock losses in bear markets.

By Mary Williams Walsh