CalPERS’ 2012 ‘focus list’ generated strong excess returns – consultant

Updated look at the “CalPERS Effect” by Wilshire Associates

The latest ‘focus list’ of the California Public Employees Retirement System (CalPERS), where the giant US fund engages with underperforming US companies, has posted strong returns in the year to end-June 2013.

The $271.8bn (€200bn) fund cited a report it commissioned by consulting firm Wilshire Associates which found the 2012 Focus List Fund generated excess returns of 7.71% relative to the Russell 1000 and 10.42% relative to the Wilshire 5000 sector groups.

CalPERS, whose focus list program dates back to 1987, said Wilshire’s findings “demonstrate strong evidence of excess returns, and returns potential, from the Focus List Program”.

More broadly, Wilshire found that for the five years after the start of engagement – or “initiative date” – the average for all engaged companies since 1999 produced excess cumulative returns of 13.72% above the Russell 1000 Index and 12.11% above their respective Russell 1000 sector indices. It’s the latest evidence of the so-called “CalPERS Effect”, a term coined in 1994 in a study by Stephen Nesbitt in the Journal of Applied Corporate Finance.
The Wilshire findings were due to be presented a meeting of CalPERS’ Investment Committee today (October 14).Wilshire’s report, written by Managing Director Andrew Junkin, concludes: “CalPERS’ approach to improving portfolio returns by engaging management of poorly performing companies to rethink governance and strategy continues to work.

“Despite underperforming the Russell 1000 by 38.87% for the three years up to the initiation of CalPERS’ shareholder activism, the 183 companies that were targeted by the System from 1999 through 2012 have outperformed by 13.72% over the subsequent five-year period on a cumulative basis.”

It went on: “Most investment resources in the industry continue to be focused on identifying small misvaluations in publicly traded stocks. This is, perhaps, unfortunate since investors are not earning a satisfactory return on the manager fees and brokerage costs they pay, given the evidence showing that the public stock markets are fairly efficiently priced.

“However, the evidence is equally clear that many corporate assets are poorly managed and that resources spent on identifying and rectifying those cases can create substantial opportunity and premium returns for active shareholders.” Link