By Heather Gillers and Dawn Lim 

It didn't take Yu Ben Meng long to find problems at the nation's largest pension fund.

Six months after starting as investment chief of the California Public Employees' Retirement System, he told board members at a Santa Rosa, Calif., gathering in July that some older investments might be valued too richly, said people familiar with the matter. By fall, the fund had shaved the value of a real estate investment trust and was looking more closely at a five-plus-year-old bet on a solar developer, other people said.

The steps are emblematic of Mr. Meng's overhaul of the $389 billion fund known as Calpers. Now as his first year comes to a close, Calpers has cut ties with a longstanding manager on a hometown project, jettisoned underperforming stock pickers, and slowed work on a multibillion-dollar private-equity experiment.

Calpers' has struggled to consistently meet its 7% yearly target at a time of high retirement costs and ultralow interest rates. The pension fund has on hand only about 70% of the assets it will need to fund future retirement checks for more than 1.9 million California police, firefighters and other public workers.

Mr. Meng's swift changes reflect the latitude Calpers has given him to remake the fund. Mr. Meng, who worked for China's foreign-exchange regulator, is the fund's first investment chief in 10 years who has had an investing job on Wall Street.

"We're doing too many things. We are not spending enough time on the investment activities," Mr. Meng told the board in January. He is the third investment chief in a challenging decade that followed the 2008 financial crisis and a scandal that sent a former Calpers' chief executive to prison on bribery charges.

Mr. Meng, a China native turned U.S. citizen, has worked at Morgan Stanley, Lehman Brothers and Barclays Global Investors. He spent seven years at Calpers before working for State Administration of Foreign Exchange, which supervises China's trillions in foreign reserves. He told board members in January that the world today has many bigger, more nimble asset managers not based in Sacramento.

"Twenty years ago, maybe even 10 years ago, you know, Calpers was one of the biggest fish in the financial pond," Mr. Meng said. "That luxury of ours has diminished today."

In his first week, Mr. Meng surprised staffers by introducing himself to employees from the most junior to senior level. Over the next few months, he was taken aback by how little some staffers knew about the fund's investments, a person familiar with the matter said. Mr. Meng concluded some lacked information he thought needed to be routinely monitored.

Mr. Meng has since consolidated oversight, requiring staff who monitor valuations to report to a central operations team instead of individual asset-class heads. He tied senior staffers' pay more closely to the performance of the entire fund, rather than just strategies they worked on.

Calpers CEO Marcie Frost praised Mr. Meng for taking "a hard look at the portfolio."

"He's doing exactly what he was hired to do," she said.

He has been re-examining everything from how the pension benchmarks returns to how it should borrow against pension assets to clear the way for market wagers. He told board members in May that risk was more complex than many investors thought. Building on a review already under way, Calpers revamped the algorithm dictating what goes into its stock index portfolio, which holds $130 billion. This resulted in the removal of 143 stocks, including prison stocks that Calpers had drawn heat for and the addition of 198, nearly half of them Chinese companies.

Calpers also jettisoned most of its external stock pickers, citing lagging results.

Acting on the results of an evaluation already in progress when he joined the fund, Mr. Meng brought management of about $20 billion in-house, saving more than $100 million a year, spokesman Wayne Davis said. The fund also jettisoned four of five firms in a program that sought to attract women and minority managers that his predecessor helped grow.

Cuts to such a program "could be a hot potato and have political ramifications," said Co-Chairman Howard Marks of Oaktree Capital Management. "But if your job is to achieve investment performance, you can't be confused about what's No. 1."

Under Mr. Meng, Calpers slowed work on a plan to design up to $20 billion in private-equity megafunds. A Calpers consultant said last month the plan is "not at front burner." Calpers remains committed to implementing the strategy at the appropriate time, said the spokesman. This year, Mr. Meng hired the fund's first permanent private-equity chief in more than two years.

Some longtime partners haven't been spared in the overhaul.

Mr. Meng's administration scrapped a Calpers-backed plan by Los Angeles real-estate firm CIM Group to build Sacramento's tallest tower that had won applause from local politicians. Calpers ratcheted up its scrutiny of the firm, writing down its small investment in a real estate investment trust by tens of millions of dollars after staffers felt they weren't given information they wanted on the firm's valuation methodology, said a person familiar with the matter. CIM said that it gave Calpers any information it asked for and made all required public disclosures to shareholders.

Staffers are looking more closely at a CIM-controlled developer of solar energy assets that some staffers at the fund believe is worth half or less of what it is valued at, a person familiar with the matter said. CIM said that Calpers's valuations of its investments have been appraised by a third party and approved by the pension fund.

One thing surprised the investment chief.

He didn't realize dealing with board members and stakeholders would take up so much time, said a person close to his thinking. Mr. Meng has since readjusted his expectations, people said. Meanwhile, the pension is considering holding fewer board meetings.

Write to Heather Gillers at heather.gillers@wsj.com and Dawn Lim at dawn.lim@wsj.com

 

(END) Dow Jones Newswires

December 11, 2019 08:47 ET (13:47 GMT)

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