Big Trouble at CalPERS?

Mary Williams Marsh of the New York Times reports that after CalPERS CIO's abrupt departure, the trustees are talking about the next steps:

Trustees of CalPERS, the country’s biggest public pension fund, met on Monday to discuss next steps after the sudden resignation this month of the fund’s chief investment officer, Ben Meng.

Mr. Meng joined CalPERS, as the $410 billion California Public Employees’ Retirement System is known, in January 2019 and had produced good results in a tough market, said Henry Jones, president of the fund’s board. But he left abruptly on Aug. 5, a day after an anonymous complaint was filed with California’s Fair Political Practices Commission about possible conflicts of interest involving Mr. Meng’s personal investments.

Although the complaint did not list any specific investments, the five-member commission’s review has focused on Mr. Meng’s ownership of shares in the Blackstone Group, a publicly traded investment firm. CalPERS, which has invested in Blackstone’s private-equity funds before, committed $750 million to such a fund after Mr. Meng was hired. He had disclosed that he owned a stake in Blackstone shortly after joining CalPERS, using the standard form that state officials use when disclosing their investments. His stake was between $10,000 and $100,000, according to the form.

Mr. Meng had worked on Wall Street and at CalPERS earlier. Most recently, he was the deputy investment chief of the State Administration of Foreign Exchange, a Chinese agency in charge of the country’s foreign reserves. Mr. Meng was born in China but is a citizen of the United States.

In a statement posted by CalPERS announcing his resignation, Mr. Meng said he was proud of the changes he had helped bring about at the fund, “but at this time, it’s important for me to focus on my health and on my family and move on to the next chapter in my life.”

Mr. Meng could not be reached for comment.

With tensions between the United States and China deteriorating in recent months. Representative Jim Banks, Republican of Indiana, had raised concerns about Mr. Meng’s ties to China, including on Twitter. But the concerns he highlighted don’t appear to be what the California commission is investigating.

As of now, there is no evidence that Mr. Meng made investment decisions for CalPERS that were designed to benefit his own holdings. Last Tuesday, he received, through his lawyer, a letter from the commission saying it intended to investigate the anonymous complaint but had “not yet made any determination about the validity of the allegation(s).”

CalPERS said in a statement after the resignation that it had been aware of questions regarding Mr. Meng’s personal investments, but considered them “private personnel matters” that “already have been addressed according to our internal compliance protocols.”

Mr. Jones, the board president, said in a statement that Mr. Meng had overseen a 12-month investment return of 4.7 percent as of June 30, “during the most volatile market conditions in our country’s history.” That was better than the CalPERS target of 4.3 percent at the time, he said.

CalPERS’s deputy chief investment officer, Dan Bienvenue, is serving as the interim investment chief while trustees search for a successor. Their discussions on Monday were held in a closed-door session.

“We are committed to strong compliance protocols,” Marcie Frost, the chief executive of CalPERS, said in a statement on Monday. “At next month’s meeting, we will bring to the board specific policy options for their considerations.”

CalPERS is sensitive to even the appearance of conflicts of interest, given its visibility and outsize role in the economic life of California, its cities and its taxpayers. For the past two decades, the fund has operated with far less money invested than it will need to cover all the benefits it must pay. Taxes around the state have gone up as CalPERS has billed local governments for larger and larger mandatory annual contributions.

Andrew Sheeler of The Sacramento Bee also reports that the California ethics agency is opening an investigation into the former CalPERS investment chief: 

The California agency that enforces state political conflict of interest laws confirmed it is opening an investigation into two complaints regarding former CalPERS Chief Investment Office Yu Ben Meng.

The Fair Political Practices Commission announced its review in an Aug. 11 letter to Meng’s attorney that the agency released to The Sacramento Bee on Monday.

Also Monday, State Controller Betty Yee reiterated her request for the California Public Employees’ Retirement System to launch its own “swift and thorough” inquiry into Meng.

She spoke at a special CalPERS Board of Administration meeting that primarily took place in a closed session outside of public review. She and CalPERS Board of Administration member Margaret Brown urged their colleagues to broaden a discussion about the investment chief.

CalPERS Chief Executive Officer Marcie Frost said the pension fund is preparing policy options for the board to consider next month. 

“We will always do everything we can to be transparent and accountable in our mission to deliver retirement security to California’s public employees,” she said.

Meng resigned abruptly on Aug. 5 after being on the job overseeing the pension fund’s $412 billion investment portfolio for less than two years.

His departure followed an anonymous complaint to the state ethics agency that Meng had approved a $1 billion deal with Blackstone Group Inc., a New York-based financial firm in which Meng was a shareholder.

According to Meng’s conflict-of-interest disclosure, he held as much as $100,000 in Blackstone stock.

The FPPC received a second complaint regarding Meng the day after his resignation. It cited a news article about his exit from the fund, according to the letter to Meng’s attorney.

Meng’s resignation statement said that he needed to “focus on my health and on my family and move on to the next chapter in my life.”

Meng worked at CalPERS from 2008 to 2015 before leaving to become deputy chief investment officer for China’s State Administration of Foreign Exchange. He returned when CalPERS hired him as chief investment officer.

So Ben Meng resigned from CalPERS on August 5th when I was off from my blogging duties.

CalPERS put out an official statement that day: 

CalPERS announced today that Chief Investment Officer Yu (Ben) Meng is resigning, effective August 5.

Dan Bienvenue, deputy chief investment officer, will serve as interim chief investment officer. CalPERS will start an immediate search for a permanent successor.

Meng has been CalPERS’ chief investment officer since January 2019. Under his leadership, CalPERS recently announced a fiscal year 2019-20 return of 4.7%, beating its benchmark of 4.3% during a time of extreme financial market volatility sparked by the coronavirus pandemic.

“I deeply believe in the CalPERS mission of serving those who serve California,” Meng said. “I’m proud of the work we did to change the portfolio, build a skilled Investment Office, and set CalPERS on a strong path to achieve our return target. But at this time, it’s important for me to focus on my health and on my family and move on to the next chapter in my life.”

The day after, on August 6, CalPERS put out a statement from Board president Henry Jones on the CIO's resignation:

Yu (Ben) Meng played an important role helping to reshape CalPERS’ Investment Office, build a strong team, and prepare the fund for the future. We respect Ben’s decision to resign and wish him well as he focuses on his health, his family, and moves on to the next chapter in his life.

CalPERS achieved a 4.7% return in fiscal year 2019-20 during the most volatile market conditions in our country’s history. This is a testament to the dedication of our team and the strength of our plan. We beat our benchmark of 4.3%, and the Wall Street Journal has reported that public pension funds returned an average of 3.2%. This significant achievement is the result of a great team effort.

CalPERS has known about questions regarding Ben’s Fair Political Practices disclosure filings. These are private personnel matters and already have been addressed according to our internal compliance protocols.

CalPERS is moving forward and recruiting a new chief investment officer. A board meeting has been scheduled for August 17 to discuss personnel matters. In the meantime, our organization remains focused on providing retirement security to members and supporting our employer partners.

Now, I was surprised to learn Ben Meng resigned because of questions linked to his financial disclosure.

Recall, in late June, I spoke with Ben for an hour in a webcast and blogged about it here.

I've always been an ardent supporter of Ben, think very highly of him, and this disclosure gaffe, while clearly violating CalPERS's compliance rules, changes nothing in terms of what I think of the man.

Importantly, let me be clear, CalPERS just lost a great CIO, and while he will be replaced, the organization is reeling and the new CIO will start from scratch trying to implement much needed changes which Ben was trying to implement.

This isn't good for CalPERS, its management team, its employees and more importantly, its contributors and beneficiaries.

Did Ben Meng screw up? Absolutely, no two ways about it, if you're the CIO of a major pension fund or an employee of a major pension fund, you have to follow the tight compliance rules and not buy or sell stocks when they are on a restricted list. That's just basic common sense.

But do I think Ben Meng should have resigned over this alleged non-disclosure? No, I would have handled the situation in an entirely different but totally transparent way. I would have fined him and asked him to publicly apologize but certainly not demand his resignation. 

The problem is CalPERS is such a politicized shop that if you so much as sneeze the wrong way, reporters and government politicians and bureaucrats will be all over you.

It's completely and utterly ridiculous which is one reason why large US public pensions will always lag their Canadian counterparts.

Don't get me wrong, rules are rules, they're there for a reason and everyone must follow them, but it's the political charade I can't stand and all these holier than thou bloggers like Yves Smith at naked capitalism who keeps harping at CalPERS the same way some religious zealot harps on the word of God.

I honestly can't stand sanctimonious nonsense from Yves Smith (aka Susan Webber) or CalPERS's board members who think there is something very sinister that is going on.

There isn't, and unless the FBI opens a criminal investigation into Ben Meng's dealings which I don't see happening, I suggest everyone refrains from making wild accusations.

What else? Let this be a lesson to all you CIOs and pension employees, invest in the S&P 500 ETF (SPY), the Nasdaq ETF (QQQ) or some balanced fund ETF (AOM, AOK, AOA or VBAL.TO) and don't risk getting embroiled in some silly non disclosure over a stock purchase.

[Note: There are now more ETFs than stocks but do your due diligence and make sure you know what you're buying, look at liquidity, top holdings, etc. and in my opinion, you're better off sticking with SPY instead of trying to pick stocks.] 

As far as Ben Meng, I wish him well, part of me thinks he will be better off very far away from CalPERS and all the political nonsense in Sacramento. He deserved a lot better treatment than this.

As far as CalPERS, it's time to move on, pick a solid CIO who will be able to lead the investment team and navigate all this political nonsense going on in California. It's not easy but try to find someone like Chris Ailman at CalSTRS and make sure the next CIO is going to be there for a minimum of five years, if not ten (you need two terms to make a difference!!).

Are there people I think can do a great job as CIO of CalPERS? You bet but I doubt they're willing to deal with the political nonsense and ridiculous scrutiny that comes with the job.

That's the CalPERS curse, a very bad curse if you ask my opinion, until they address it head on, it will weigh on the organization and detract from long-term performance.

I hope I'm wrong but Ive been around long enough to know the real deal at CalPERS and other large US public pensions. There's simply way too much political interference and it often deteriorates into a circus show whenever something bad arises. 

Like I stated above, this issue could have been handled in an entirely different way but the political hacks and vengeful bloggers screamed for blood and they got it.

Below, Ben Meng introduces Greg Ruiz, Head of PE at CalPERS, and Mario Giannini, CEO of Hamilton Lane to discuss lessons from private equity over the last three decades. This discussion took place in July before the storm hit.