Calpers Investment Head Eliopoulos Plays Long Game With Pension

CALPERS

Signage stands outside the offices of the California Public Employees' Retirement System (Calpers) in Sacramento, California, U.S., on Monday, Sept. 13, 2010.

Photographer: Ken James/Bloomberg

Ted Eliopoulos doesn’t fret over the meager 2.4 percent he earned last year for the biggest U.S. pension even though it was a third of what was needed. Time, he says, is on his side.

Appointed chief investment officer last year for the $300 billion California Public Employees’ Retirement System, Eliopoulos inherited a fund struggling with market volatility caused by six years of near-zero interest. It’s seen swings of more than 20 percentage points in earnings from year to year, and for the first time, the cost of pension checks outpaces income.

“We truly believe that a long-term investment horizon is both our responsibility and it’s our advantage,” Eliopoulos, 51, said at his Sacramento headquarters. “We think of everything we do in terms of the very long-term horizon.”

His decision to wait out the market could have profound consequences for cash-strapped municipalities that must pay up when earnings fall short. It’s also being closely scrutinized by other U.S. pensions that view Calpers as a bellwether for investing a collective $3.7 trillion.

Stressed Out

“You’ve got to quit looking at the portfolio every day,” said Richard Costigan, a Calpers board member who backed Eliopoulos when the panel’s elected and appointed members replaced Joe Dear, who died of cancer last year. “I’ve got the little app on my phone that tells me what my portfolio is worth, and it stresses me out. One minute you’re up, two days later you’re down 3 percent, then you’re back up.”

“I’m very comfortable with what Ted’s doing.”

Eliopoulos was the highest-paid state worker in 2014 at $739,594. Educated as a lawyer, and with a real-estate background, his decisions have rippled through Wall Street.

He announced last year that Calpers would redirect the $4 billion it had invested in hedge funds, saying they cost too much, were too complex and didn’t return enough.

In June, he said the fund would sell $3 billion of real estate.

He is culling external money managers. He’s pushing private-equity investments -- where a firm buys the majority of a company and sells it for a profit -- into accounts where he can better negotiate fees.

Organizational Leader

“When Ted became CIO, he told me he really wanted to be a CIO who focused on improving the management, the risk management and the efficiency of the operation,” said Phil Angelides, a close friend who served as California’s treasurer and was on Calpers’ board. “He was less interested in being a CIO who was known for his market insights.”

Eliopoulos’ tenure comes amid a generational shift: With costlier benefits awarded to public employees and baby boomers retiring and living longer, the fund must pay out more each month in pension checks than it collects from investments and government contributions.

“The gap is going to grow greater,” Eliopoulos said.

A graduate of Dartmouth College in New Hampshire and the University of Virginia’s law school, he developed a passion for Greek literature and mythology and on his desk keeps a bust of Satyros the boxer, one of the toughest prize fighters of the third century B.C.

Eliopoulos’ Calpers connection dates to when he worked for Angelides as a deputy treasurer from 2002 to 2006, standing in for him at Calpers board meetings.

In 2007, he landed at the pension as head of real estate, taking over at the start of the worst housing market in decades. By 2010, it had lost 37 percent.

“It was a pretty stressful moment,” said Chris Olsen, Eliopoulos’ law-school roommate. “There had been decisions made, and he had to come in and demonstrate a turnaround.”

Eliopoulos sold speculative residential investments as values slumped, and pushed money into holdings that generate steady income such as rental apartments, industrial parks, offices and retail space.

“I don’t think he walked into it with a ton of fear or trepidation,” Olsen said. “He saw it as a great opportunity.”

Latest Challenge

Not all board members share Eliopoulos’ caution.

“His risk tolerance and my risk tolerance are just different,” said J.J. Jelincic, a former labor leader elected to the board in 2009 to represent workers. “In down markets, he looks a lot smarter than I am, and in up markets, I look a lot smarter than he does.”

Eliopoulos’ challenge now is to earn the 7.5 percent annually the fund assumes it needs to cover benefits for 1.7 million members. Calpers estimates it’s short 23 percent, a situation that could deteriorate if it misses its target.

Calpers made 7.76 percent over 20 years, though it’s seen results ranging from a 23.6 percent loss in 2009 to a 20.7 percent gain two years later.

“Returns across all asset classes are lower than what we’ve experienced in the recent past,” said Eliopoulos. “That’s a reality. Those types of bull-market returns don’t go forever. And it is a reality that we and other investors are facing.”

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