How do you choose a CIO for a $490B pension fund?

The largest US public pension fund is looking externally for its next chief investment officer, following a long spell of lackluster returns and leadership churn. 

The short list of candidates to run the California Public Employees’ Retirement System’s roughly $490 billion portfolio includes Jonathan Grabel, CIO of the Los Angeles County Employees Retirement Association, according to people familiar with the matter.

He’s among the final four candidates — all of them from outside the pension fund — being considered to run the portfolio, one of the people said.

The short list doesn’t include interim CIO Dan Bienvenue, a 20-year Calpers veteran. Bienvenue told acquaintances he decided not to make a bid for the job after being passed over in two past CIO search rounds, according to some of the people. Calpers plans to announce its choice by the end of the month, said spokesperson Brad Pacheco. 

Whoever takes over will lead a team of about 370 people on a high-pressure quest to meet the chronically underfunded pension’s annualized return target of 6.8%, while also navigating political tensions and intense public scrutiny. 

The last person to hold the post was Nicole Musicco. Calpers announced her departure in September, less than two years after she took over as the pension’s fourth CIO since 2009.

“I don’t know that there are any other seats on any US company or US public pension plan that have the same transparency and visibility,” Calpers CEO Marcie Frost said in an interview last year. “And some people don’t know if they’re wired for it — or they think they’re wired for it — until they actually sit in the seat.” 

Calpers declined to comment. Grabel didn’t respond to requests for comment.

PROACTIVE BOARD

Last week, the entire board participated in the second and final interviews. The session, which included post-interview deliberations, lasted more than 10 hours.

After the successive CIO resignations, the 12 members of the board are taking a proactive role in the selection process, according to people familiar with the matter. Board members called on Calpers staff and its executive search firm, Dore Partnership, to make sure they sought diverse candidates and gave applicants a clear-eyed view of the pension’s political environment. 

While an outsider can bring fresh perspective, any newcomer faces a steep learning curve navigating the interests of the Service Employees International Union, climate activists and lawmakers. 

“We need to be up front that whoever is going to be successful in our CIO role has to understand the politics,” Lisa Middleton, a Palm Springs city council member, said during a meeting last year. 

Frost and five board members spent two full days in January interviewing eight candidates, according to documents posted by the board and obtained through a public records request. The committee narrowed it to five candidates, one of whom dropped out, one person said. 

Calpers, which manages money for more than 2 million retired police, firefighters and public services employees, has only 72% of the assets it needs to pay for future benefits owed. That means the stakes are high for the next CIO to meet its return target. If it falls short, municipalities across California could be forced to make up the difference and even cut services to meet obligations. 

Calpers gained 5.8% for the fiscal year ended in June. Over the most recent five-year period, the fund ranked in the bottom 90th percentile when compared to peers tracked by Wilshire Trust Universe Comparison Service, and its 10-year record is in the bottom 84th percentile. 

The new chief would have to get a handle on a portfolio that has grown more complex through management changes and an aggressive expansion into private equity and private credit. At Lacera, Grabel opened the fund’s private equity co-investment strategy to a larger pool of managers to access more deal flow. 

The interviews are in part a redo for Grabel, who was a finalist during Calpers’ 2018 recruiting process, according to a person familiar with the matter. Grabel is experienced in navigating an often politicized role that’s equal parts investment expertise and catering to diverse public opinions, having spent six years at two state pension funds with city council members and law enforcement officers on their boards. 

“We’re looking for someone with experience dealing with labor interests, employer interests and someone not coming out of the corporate world,” said Terry Brennand, director of revenue, budgets and pensions at SEIU, California’s largest union, which closely monitors Calpers’ policies. “We’ve been assured that all the candidates meet that.”