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)
Copyright (c) 2019 Dow Jones & Company, Inc.