Everybody's heroes, mine too

Usually, my Twitter-friendly attention span doesn’t let me go beyond the first 150 words of anything. The only recent exceptions being the Steve Jobs biography and the TV18 rights issue prospectus. But I surprised myself finishing all of 16 pages and 8,249 words, while clinging for life in a Bombay local, on the way to the high court from Churchgate, fighting sleep on my bed and at my desk in between deadlines.

I must thank my friend Bala for forwarding this feature by Princeton lecturer James Shinn on the California Public Employees’ Retirement System (CalPERS) for a New York-based magazine, Institutional Investor, http://bit.ly/yuDhYo, and saving me from the ignominy of not reading one of the most interesting and insightful pieces of investment writing in recent times.

Leveraging his rare access as one of the few people called by the CalPERS board for advice and drawing from the experiences of his exciting work life, which has taken him from Wall Street to Silicon Valley to Pentagon to Princeton, Shinn (www. jamesshinn.net) brings forth the vexing investing dilemma of our times, while painting a compelling picture of the $235-billion giant itself.

CalPERS had led the way in the 1980s and 1990s, moving a significant portion of its portfolio to risky assets, such as equities, real estate and foreign stocks. While the move helped it reduce the reliance on government grants during the boom years, it backfired in the crash of 2007-08, when the portfolio cracked by 38 per cent from $260 billion to $160 billion. Low interest rates have hit fixed income and chaotic markets have made equities a dangerous place.

Shinn described how CalPERS had gone from being “everybody’s hero, mine too” to a giant in crisis, wondering how to prop up its “liability-driven investment” model to achieve a 7.75 per cent returns target or face the wrath of taxpayers by asking for more government/employer assistance.

“I figured everybody in the room was intently aware that CalPERS had about $110 billion, or half of its portfolio, in listed stocks, whose official return was targeted at 7.75 per cent. I sympathised with the board’s dilemma. I’d been uncomfortably calculating the likely return on the stocks in my personal portfolio over the previous few months and had realised that I had to either write down the expected return or go make some more money. Every saver, personal or institutional, was in the same boat,” Shinn wrote. In a crisis atmosphere and increasingly volatile markets, “go make some more money” is easier said than done. One of the estimates put before CalPERS said, “We think five to six per cent is a reasonable expectation for stocks in the coming decade.”

Two days after the article was published, on March 14, CalPERS decided to cut its returns target to 7.5 per cent. CalPERS’ is the story of any large institution trying to manage public money to meet fixed liabilities in the future. Back home, the Employees Provident Fund Organisation (EPFO) followed suit cutting returns, albeit to a significantly higher 8.25 per cent.

The Securities and Exchange Board of India chief, U K Sinha has been vocal about the need to get Indian pension money invested in equities. The finance minister last week has announced incentives for putting money into equities. Life Insurance Corporation has been merrily buying stocks worth thousands of crores.

But, the EPFO trustees, who have been shooting down equities all along, suddenly somehow look like “everybody’s heroes, mine too”.