Last week California’s largest public pension fund, CalPERS, issued a misleading press release about its private equity investments. To understand what CalPERS did, compare it to a report from your mutual fund or see the screenshot below from a typical mutual fund report:
Notice how the fund reports its periodic returns in comparison to the S&P 500 for the same period, a standard benchmark for stock market investors. By including that reference, investors can evaluate the value provided by the mutual fund manager.
Now, compare that to CalPERS’s press release about returns from its private equity investments:
Notice what’s missing? Unlike the mutual fund, CalPERS didn’t include an index against which to compare periodic returns. That’s bad enough but in the paragraph preceding that chart of returns, CalPERS added this deceptive reference:
“The [private equity] program’s absolute performance . . . has been strong in all reported time periods, given CalPERS’ Total Fund target of 7.5 percent.” (Itals. added.) With that sentence, CalPERS is encouraging the reader to compare the return from its private equity investments to an inappropriate target that includes non-equity investments. That’s like your mutual fund encouraging you to compare your stock fund to a lower-yielding fund consisting of not just stocks but also bonds and cash.
There is a right way for CalPERS to report and compare its private equity returns — and CalPERS already knows it, as Eileen Appelbaum and Rosemary Batt report here. So does every other sophisticated investor that invests in alternative investments.
It gets worse. The press release reported only one category of fees paid to private equity firms. At a minimum CalPERS should follow the lead set by Texas (see Table 8 on page 55 here) and report all fees in one spot.
These spins are not harmless. Citizens bear the consequences. Past CalPERS spins have already cost them billions of dollars in cuts to services and increases in taxes. CalPERS should issue clear and honest reports like those issued by another huge financial intermediary, Berkshire Hathaway. Compare their latest annual reports, which you can find here and here. Journalists and the citizens to whom they report should demand the same of CalPERS.