Calpers, Calstrs eye lofty market, Goldman

By Jim Christie and Megan Davies

BEVERLY HILLS (BestGrowthStock) – The chief investment officer of Calpers, the biggest U.S. public pension fund, warned on Monday that U.S. stock investors may have gotten overly optimistic and the economy still faced serious challenges.

Joseph Dear of Calpers, the $213 billion California Public Employees’ Retirement System, also said financial reform was needed now. An investigation into whether Goldman Sachs (GS.N: ) hid crucial information from investors about a subprime mortgage-linked security underscored public concern about Wall Street, he said.

“Goldman Sachs is clearly working hard to maintain trust, that’s the key for them, will their counterparties and investors maintain trust with them,” Dear said on the sidelines of the Milken Institute Global Conference.

Asked what Calpers reaction would be if Goldman was found to be guilty, he said the pension fund would “certainly step up the governance effort about what happened in the governance of the corporation”.

“But it’s a big hypothetical,” Dear added. He said that Goldman doesn’t manage a lot of money for Calpers.

On Monday, fellow pension fund Calstrs’ chief investment officer, Christopher Ailman, said his fund was monitoring the situation but was not altering its business relationship with the Wall Street titan for now.

“I wonder if the market is ahead of itself,” Calpers’ Dear told Reuters in an interview on Monday. “Memories do tend to be short.”

Calpers’ portfolio is up 25 percent for the 12 months through March, recovering much of the ground it lost when markets tumbled in 2008 and early last year — a considerable feat given an uncertain economy, Dear said.

Despite a recovery, Dear said he remains cautious, noting a variety of troubles from an uncertain consumer spending rebound to unemployment facing the U.S. economy that could stall and roll back the appreciation of the many assets within Calpers’ portfolio.

“It’s a worry,” he said. “Even with the optimistic (economic) reports, the challenges in front of us are huge.”

Unemployment ranks among the top challenges facing the economy, Dear said, echoing other speakers at the conference in Beverly Hills, California.

Another major challenge facing markets is the outcome of efforts in Washington to regulate the financial system coming against a backdrop of expanding government debt, Dear said.

The U.S. Securities and Exchange Commission’s fraud lawsuit against Goldman Sachs Group Inc (GS.N: ) underscores the determination behind the effort.

“The government’s action has come to symbolize the public’s concern,” Dear said. “The government has to prove its case.”

That echoed the wait-and-see attitude of Calstrs’ Christopher Ailman.

We’ll assume they’re innocent until they’re proven guilty,” said Ailman, CIO of the California State Teachers’ Retirement System, on the sidelines of the Milken conference. Calstrs has an account with the bank on their asset management side and does some business with them through Goldman’s broker-dealer unit, he added.

TACKLING PUBLIC CONCERNS

Financial regulation is necessary, Dear said, noting that: “Financial reform is about the steps necessary to restore confidence.”

“This legislation is so important for the long-term health of capital markets that it’s not surprising that things are getting so intense,” Dear added.

Over the past year, Dear has been busy addressing public concerns of his own about Calpers.

The pension giant suffered such steep losses when markets plunged that its 7.75 percent assumed rate of return was drawn into question, casting doubt on its investment strategies and risk management practices.

Calpers is currently reviewing that target rate and may opt to change it before the end of the year.

Additionally, the national controversy of placement agents selling deals for, mainly, private equity firms at public pension funds fell on Calpers like a ton of bricks when it discovered that one of the most successful of the middlemen knocking on its doors was one of its former board members.

“The placement agent controversy has put a cloud over the integrity of the investment process” at Calpers, Dear said, explaining why he wants to ban the middlemen from selling business to the fund.

“I want to run Calpers such that no investment manager will feel they need a placement agent,” Dear said.

Dear is also taking a harder line with Calpers’ private equity partners, noting that he aims to build on a recent deal with Apollo that reduced its fees, which should save the fund $125 million over the next five years.

“That’s certainly our intent,” Dear said. “I think we can make tremendous progress there.”

Penny Stocks

(Reporting by Jim Christie and Megan Davies; Editing by Edwin Chan)

Calpers, Calstrs eye lofty market, Goldman