Part Seven: Tapping the State Pension Fund: Against all odds—literally—a regent secures billions of dollars in CalPERS investments
The California Public Employees Retirement System (CalPERS), the nation’s largest public pension fund, is charged with managing $205 billion worth of investments on behalf of 1.6 million state workers. Its portfolio is larger than the gross domestic products of a dozen nations. Given its deep pockets, CalPERS is viewed as an investor to watch—its influence is so great that it can single-handedly make or break a corporation or private equity fund with its decisions.
Billions for Blum
Since 2004, Mr. Blum has had a direct influence on where CalPERS puts its money. His firm, Blum Capital Partners, is paid $3 million a year to handle $500 million worth of CalPERS investments as an external investment advisor.
According to reports issued for CalPERS by the investment advisory firm, Wilshire Consulting, Blum Capital Partners invests CalPERS money in public companies where Blum Capital Partners itself holds dominant ownership stakes, including the for-profit colleges Career Education Corporation and ITT Educational Services. It also places CalPERS money into its own private equity investment vehicles. But as of March 2010, CalPERS has reported an aggregate loss of 18 percent in these Blum funds.
In addition to hiring Blum Capital Partners to control a half billion dollars in investments, the pension fund has placed billions of dollars with three other companies where Mr. Blum has significant ownership stakes. CalPERS also pays large management fees to two of these entities.
Billions for Blum
Since 2004, Mr. Blum has had a direct influence on where CalPERS puts its money. His firm, Blum Capital Partners, is paid $3 million a year to handle $500 million worth of CalPERS investments as an external investment advisor.
According to reports issued for CalPERS by the investment advisory firm, Wilshire Consulting, Blum Capital Partners invests CalPERS money in public companies where Blum Capital Partners itself holds dominant ownership stakes, including the for-profit colleges Career Education Corporation and ITT Educational Services. It also places CalPERS money into its own private equity investment vehicles. But as of March 2010, CalPERS has reported an aggregate loss of 18 percent in these Blum funds.
In addition to hiring Blum Capital Partners to control a half billion dollars in investments, the pension fund has placed billions of dollars with three other companies where Mr. Blum has significant ownership stakes. CalPERS also pays large management fees to two of these entities.
- CB Richard Ellis. Mr. Blum serves as chairman of the board of the giant real estate firm, and CalPERS has invested $229 million in CB Richard Ellis’ European funds. As of June 2009, however, these funds had decreased in value by 56 percent because CB Richard Ellis had taken excessive risks with private equity investments, according to CalPERS reports. Nonetheless, in 2009, CalPERS paid CB Richard Ellis a fee of $3 million for its investment advice. (For my long-time readers...names sound familiar?? They were brought up, or attempted to be brought up at some tables, but was sssshhhh'd...how's that shushing working for us now???)
In total, CalPERS’ investments in Mr. Blum’s private equity empire—via Blum Capital Partners, CB Richard Ellis, TPG Newbridge, and TPG Capital—added up to nearly $2.5 billion in 2009. (2009 is significant?? That awesome "Great Delta Reform Act of 2009" came down.)
The Governor’s Connection
Mr. Blum is not the only regent with a financial connection to CalPERS. Since 2004, CalPERS has paid $4 million a year to Dimensional Fund Advisors—a firm in which Gov. Schwarzenegger and Mr. Wachter have ownership stakes—to manage a $1.5 billion portion of its portfolio.
CalPERS investment in Dimensional Fund Advisors began in the 1990s and has averaged an annual return of 2.6 percent, according to a CalPERS press officer. (That rate of return was substantially lower than the average 6 percent return from fixed income instruments during the same period.)
CalPERS has also committed $2 billion to four private equity funds operated by Apollo Management. As previously detailed, Gov. Schwarzenegger and Mr. Wachter each have significant ownership stakes in Apollo Management.
Probability As an Investigative Tool
In addition to its direct investments with Blum Capital Partners, CalPERS separately held $76 million worth of stock in all 18 of the companies in Blum Capital Partner’s portfolio of public corporations, as of June 2009. (That deserved red, didn't it??...I'm well into my 3rd glass of excellent Delta wine...the sarcasm will increase appropriately!)
This was not an unusual occurrence for CalPERS, which in previous years had also invested in all of the companies that appeared in the portfolio of Blum Capital Partners, as did UC. But according to two probability theory experts consulted for this story—university professors who wish to remain anonymous—this could not have happened through pure chance.[1] Some basic math makes this clear:
Between 10,000 and 12,000 stocks are publicly traded at any given time, and CalPERS’ portfolio includes investments in about 4,000 public corporations. Thus, the chance of CalPERS picking one of Mr. Blum’s stocks is 0.4 or 40 percent. But the chance of CalPERS simultaneously picking all 18 of his stocks is one in 15 million.[2] (I love it when someone savvier than I does the math!!)
CalPERS and UC’s matching investments in all 18 of Blum Capital’s public company portfolio is not likely a coincidence, nor is it likely based on considerations such as industry concentration or historical rates of return, because the relevant stocks crossed into multiple industries, and had varying return rates (including substantial losses). (yeah...like the Monterey Agreements...not likely a coincidence, nor is it likely based on considerations such as industry concentration or historical...blah, blah, blah...because the same thievin' shysters are playing the same damn game on us.)
In fact, based on mathematical probability, it’s likely that investment managers at CalPERS and UC purposefully mirrored Blum Capital Partner’s portfolio. And it is widely known that a CalPERS investment tends to benefit its co-investors. (So there...!!!)
In response to this probability exercise, CalPER’s spokesperson, Clark McKinley, said that not all stocks are “institution-grade investments,” so “the probability of overlap existing [between CalPERS and Blum Capital Partners] would be high.” (Wanna know what's scary?? This genius is speaking on behalf of UC...lol)
He added, “CalPERS staff has never had any contact with the governor or his office regarding [Dimensional Fund Advisors] or Apollo, or any other investment matters involving him. We deal with external managers and general partners and their funds. We don’t gather information about other limited partners or investors in such funds.” (Plausible deniability, that's all I'm saying.)
The Governor’s Connection
Mr. Blum is not the only regent with a financial connection to CalPERS. Since 2004, CalPERS has paid $4 million a year to Dimensional Fund Advisors—a firm in which Gov. Schwarzenegger and Mr. Wachter have ownership stakes—to manage a $1.5 billion portion of its portfolio.
CalPERS investment in Dimensional Fund Advisors began in the 1990s and has averaged an annual return of 2.6 percent, according to a CalPERS press officer. (That rate of return was substantially lower than the average 6 percent return from fixed income instruments during the same period.)
CalPERS has also committed $2 billion to four private equity funds operated by Apollo Management. As previously detailed, Gov. Schwarzenegger and Mr. Wachter each have significant ownership stakes in Apollo Management.
Probability As an Investigative Tool
In addition to its direct investments with Blum Capital Partners, CalPERS separately held $76 million worth of stock in all 18 of the companies in Blum Capital Partner’s portfolio of public corporations, as of June 2009. (That deserved red, didn't it??...I'm well into my 3rd glass of excellent Delta wine...the sarcasm will increase appropriately!)
This was not an unusual occurrence for CalPERS, which in previous years had also invested in all of the companies that appeared in the portfolio of Blum Capital Partners, as did UC. But according to two probability theory experts consulted for this story—university professors who wish to remain anonymous—this could not have happened through pure chance.[1] Some basic math makes this clear:
Between 10,000 and 12,000 stocks are publicly traded at any given time, and CalPERS’ portfolio includes investments in about 4,000 public corporations. Thus, the chance of CalPERS picking one of Mr. Blum’s stocks is 0.4 or 40 percent. But the chance of CalPERS simultaneously picking all 18 of his stocks is one in 15 million.[2] (I love it when someone savvier than I does the math!!)
CalPERS and UC’s matching investments in all 18 of Blum Capital’s public company portfolio is not likely a coincidence, nor is it likely based on considerations such as industry concentration or historical rates of return, because the relevant stocks crossed into multiple industries, and had varying return rates (including substantial losses). (yeah...like the Monterey Agreements...not likely a coincidence, nor is it likely based on considerations such as industry concentration or historical...blah, blah, blah...because the same thievin' shysters are playing the same damn game on us.)
In fact, based on mathematical probability, it’s likely that investment managers at CalPERS and UC purposefully mirrored Blum Capital Partner’s portfolio. And it is widely known that a CalPERS investment tends to benefit its co-investors. (So there...!!!)
In response to this probability exercise, CalPER’s spokesperson, Clark McKinley, said that not all stocks are “institution-grade investments,” so “the probability of overlap existing [between CalPERS and Blum Capital Partners] would be high.” (Wanna know what's scary?? This genius is speaking on behalf of UC...lol)
He added, “CalPERS staff has never had any contact with the governor or his office regarding [Dimensional Fund Advisors] or Apollo, or any other investment matters involving him. We deal with external managers and general partners and their funds. We don’t gather information about other limited partners or investors in such funds.” (Plausible deniability, that's all I'm saying.)
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[1] While sheer luck can generate windfall profits for securities traders, the stock market is a great leveler over the long run. It is impossible to consistently outsmart or “time” the market without insider knowledge. A long-term investor is more likely to receive an average return by picking stocks randomly, then she is by trying to outwit the system, or by paying for expensive investment advice from advisors with their own agendas. If you do not believe this somewhat counter-intuitive fact: read the classic analysis of stock market investment techniques: A Random Walk Down Wall Street (1973), by Burton Malkiel or the 2008 bestseller by Leonard Mlodinow, The Drunkard’s Walk, How Randomness Rules Our Lives.
[2] Here is the probability calculation we received after asking a probability theory expert, “What are the chances of an investor, that is holding 4,000 stocks picked out of a universe of 10,000 stocks, to randomly pick a particular group of 18 stocks?”
(And here's the math!!)
The answer: “Label those 18 stocks 1 through 18. Chance of No. 1 being in your selection of 4,000 is 4,000/10,000, or 0.4. Assuming that you have No. 1, chance that No. 2 is in the remaining 3,999 (chosen from the remaining 9,999) is 3,999/9,9999. Etcetera. So what you want is (4,000/10,000)*(3,999/9,999)*(3,998/9,998)* . . . *(3983/9983). Every one of those numbers is close to 0.4, so the answer is close to 0.4 to the power of 18. Doing the calculation exactly gives a chance of 6.872 * 10^(-8), or about 1 in 15 million.”
Posted by Peter Byrne on 09/22/10[1] While sheer luck can generate windfall profits for securities traders, the stock market is a great leveler over the long run. It is impossible to consistently outsmart or “time” the market without insider knowledge. A long-term investor is more likely to receive an average return by picking stocks randomly, then she is by trying to outwit the system, or by paying for expensive investment advice from advisors with their own agendas. If you do not believe this somewhat counter-intuitive fact: read the classic analysis of stock market investment techniques: A Random Walk Down Wall Street (1973), by Burton Malkiel or the 2008 bestseller by Leonard Mlodinow, The Drunkard’s Walk, How Randomness Rules Our Lives.
[2] Here is the probability calculation we received after asking a probability theory expert, “What are the chances of an investor, that is holding 4,000 stocks picked out of a universe of 10,000 stocks, to randomly pick a particular group of 18 stocks?”
(And here's the math!!)
The answer: “Label those 18 stocks 1 through 18. Chance of No. 1 being in your selection of 4,000 is 4,000/10,000, or 0.4. Assuming that you have No. 1, chance that No. 2 is in the remaining 3,999 (chosen from the remaining 9,999) is 3,999/9,9999. Etcetera. So what you want is (4,000/10,000)*(3,999/9,999)*(3,998/9,998)* . . . *(3983/9983). Every one of those numbers is close to 0.4, so the answer is close to 0.4 to the power of 18. Doing the calculation exactly gives a chance of 6.872 * 10^(-8), or about 1 in 15 million.”
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