CalPERS, the largest pension system in the US, just took a scalpel to funds allocated to external equity managers.

In a major restructuring of its investment process, CalPERS slashed allocations to external equity managers from $33.6 million to $5.5 million. Only three out of 17 external managers survived the purge, according to an exclusive report by Chief Investment Officer.

Further, the pension fund restructured its emerging managers’ program, docking its allocation from $3.6 billion to just $500 million. Only one out of the five emerging managers stayed on.

CalPERS Chief Investment Officer Ben Meng supported the sweeping changes.

Firings due to underperformance

According to CIO, Meng has penalized long-term underperformance of the managers. The action follows from Meng’s preoccupation with the objective of CalPERS achieving its 7% assumed rate of return. Meng is also said to be concerned about the fund’s extent of underfunding, currently 30%.

CIO saw a memo in this regard. It said Meng was placing a “renewed focus on performance and our ability to achieve our 7% assumed rate.”

Further, the memo said: “Over the last five years, traditional managers have underperformed their benchmarks by 48 bps and emerging managers by 126 bps.”

The move also due to a long-term trend and cost savings

CalPERS has steadily reverted most of its corpus of $187 billion to in-house management over the last ten years.

According to the CEO, Marcie Frost returns generated by external equity managers have not contributed enough to achieving the fund’s 7% target.

Though underperformance of outsourced managers is the most likely and apparent cause, one bonus is the savings in costs.

According to Frost, the manager terminations will result in very significant savings in fees: $ 80 million from traditional equity managers and 20 million from emerging managers.

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