CALPERS Continues to Miss the Cut


by: Eric D. Nelson, CFA

Many people have the misconception that for super-wealthy investors with hundreds-of-millions of dollars or more, there are products and strategies available with returns that far exceed those of “traditional” investments like stocks and bonds.  Every year we have a chance to put this belief to the test by evaluating the performance of the California Public Employees’ Retirement System (CALPERS), the largest pension fund in the US with over $250 Billion in assets.  If there really was an exclusive and abnormally profitable set of investment opportunities for the uber-wealthy, we would expect the largest pension fund in the country to hold them—and the exceptional returns of these strategies should greatly enhance CALPERS' total portfolio performance.


Indeed, the CALPERS portfolio has a level of complication that reflects its size.  Their Investment Policy Statement lists a strategic allocation to seven different broad asset classes including public and private equities, “income funds”, “liquidity funds”, “real assets”, “absolute return”, and “inflation funds”.  These general groupings include traditional stocks and bonds as well as non-traditional assets like real estate properties, infrastructure projects, forestland, commodities futures, private equities and hedge funds.


Yet despite the complexity, it doesn’t appear that the CALPERS investment portfolio has exceeded the return on a simple set of low cost index funds.  Table 1 looks at a few of the highlights of the CALPERS portfolio for the decade ending December 2012.


Table 1: Investment Results (2003-2012)


1YR Return (2012)

10YR Annualized Return

2008 Fiscal Year Return (July 08-June 09)

CALPERS Portfolio




80/20 Index Portfolio (1)




80/20 Asset Class Portfolio (2)




(1) “80/20 Index Portfolio” = 56% Russell 3000 US Stock Index, 24% MSCI All Country World exUS Stock Index, 20% Barclays Aggregate Bond Index; rebalanced annually

(2) “80/20 Asset Class Portfolio” = 12% DFA US Large Company Fund, 16% DFA US Large Value Fund, 28% DFA US Targeted Value Fund, 8% DFA Int’l Value Fund, 8% DFA Int’l Small Value Fund, 8% DFA Emerging Markets Value Fund, 20% DFA Intermediate Government Bond Fund; rebalanced annually


The 2012 return for CALPERS of +13% looks good on the surface, until we realize that a simple portfolio that is 80% in stock indexes and 20% in bond indexes earned +14.1%.  This combination of indexes is very similar to the Vanguard Lifestrategy Growth index fund that is available to individual investors with as little as $3,000 to invest.  The "80/20 Asset Class Portfolio” has the same mix of stocks and bonds and US/Foreign split as the "80/20 Index Portfolio", but uses the asset class mutual funds from Dimensional Fund Advisors (DFA) to target smaller and more value oriented companies on the equity side while restricting the fixed income holdings to high-quality government bonds. It performed even better, earning over +16% for the year.


So 2012 wasn’t anything to write home about for CALPERS.  But of course, one-year periods don’t amount to much—except that this result contributes to a trend that is also apparent over the last decade.  For the 10 years ending 2012, CALPERS earned a rate of return of approximately +7.5% on its fund.  This is 0.5% per year lower than the return on the simple "80/20 Index Portfolio", and almost 3.5% per year lower than the return on the "80/20 Asset Class Portfolio".  Based on these results, if there are superior investment strategies available only to the ultra-wealthy, it doesn’t appear that the biggest pension fund in the US knows about them.


Returns alone might not tell the entire story.  If CALPERS took much less risk to earn their +7.5% return, the 0.5% to 3.5% per year shortfall compared to more traditional investment allocations might be excusable.  But the worst year for all 3 portfolios, 2008 (CALPERS reports “Fiscal Year” performance for this period that covers July 2008 to June 2009), saw CALPERS lose 23.4%, noticeably more than either the "80/20 Index Portfolio" loss of 20.1% or the "80/20 Asset Class Portfolio" decline of 17.9%.  So not only did the CALPERS return miss the cut of a simple index fund portfolio or the asset class mix, it did so while taking more risk.


While no amount of evidence will likely change the way these giant investment pools direct their portfolios, individual investors of more modest wealth can take away an important message: the holy grail of superior investment strategies available only to the super-wealthy doesn't exist.  Efforts to find these mythical products will more often than not lead to a cycle of performance chasing, excessive fees, high taxes, unnecessary portfolio complexity and disappointing results.  Investors of all sizes would be far better off sticking with simple, transparent, traditional portfolios of stock and bond index and asset class funds tailored to their particular circumstances while taking pleasure in knowing they’ll probably trounce the big guys in the process.




CALPERS data from website,, and


Index Returns data from DFA Returns Program 2.0


Past performance is not a guarantee of future results.  The returns and other characteristics of the allocation mixes contained in this article are based on model/back-tested simulations to demonstrate broad economic principles.  They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision-making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only.  Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. Clients’ investment returns would be reduced by the advisory fees and other expenses they would incur in the management of their accounts.  Past performance is not a guarantee of future results, and there is always the risk that an investor may lose money.  Indexes are not available for direct investment.