MEETING STATE OF CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM BOARD OF ADMINISTRATION INVESTMENT COMMITTEE OPEN SESSION
ROBERT F. CARLSON AUDITORIUM LINCOLN PLAZA NORTH 400 P STREET SACRAMENTO, CALIFORNIA
TUESDAY, AUGUST 20, 2019 8:34 A.M.
JAMES F. PETERS, CSR CERTIFIED SHORTHAND REPORTER LICENSE NUMBER 10063
J&K COURT REPORTING, LLC 916.476.3171 A P P E A R A N C E S COMMITTEE MEMBERS: Mr. Rob Feckner, Chairperson Ms. Theresa Taylor, Vice Chairperson Ms. Margaret Brown Mr. Henry Jones Ms. Fiona Ma, represented by Mr. Matthew Saha Ms. Lisa Middleton Mr. David Miller Ms. Stacie Olivares Ms. Eraina Ortega Ms. Mona Pasquil Rogers Mr. Jason Perez Mr. Ramon Rubalcava Ms. Betty Yee
STAFF: Ms. Marcie Frost, Chief Executive Officer Mr. Matt Jacobs, General Counsel Dr. Yu (Ben) Meng, Chief Investment Officer Mr. Dan Bienvenue, Interim Chief Operating Investment Officer Ms. Caitlin Jensen, Committee Secretary Ms. Anne Simpson, Investment Director
J&K COURT REPORTING, LLC 916.476.3171 A P P E A R A N C E S C O N T I N U E D
ALSO PRESENT: Mr. Dave Elder Mr. John Griswold, Chartered Financial Analysts Institute Mr. Hiromichi Mizuno, Government Pension Investment Fund, Japan
J&K COURT REPORTING, LLC 916.476.3171 I N D E X PAGE 1. Call to Order and Roll Call 1 2. Approval of the August 20, 2019 Investment Committee Education Workshop Timed Agenda 2 3. Investment Education Workshop #3 a. Guest Keynote: “The GPIF Endeavor as a Cross-Generation, Universal Investor: Aligning Interests for Long-Term Value Creation”, Hiromichi Mizuno, Executive Managing Director, Chief Investment Officer, Government Pension Investment Fund, Japan 2 b. Public Markets Part Two: Global Equity – Anne Simpson, John Griswold, Chartered Financial Analysts Institute 88 4. Public Comment 152 Adjournment 155 Reporter's Certificate 156
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1 P R O C E E D I N G S 2 CHAIRPERSON FECKNER: If we could all please take 3 our seats, we'd like to call the workshop to order. 4 First order of business will be to call the roll. 5 COMMITTEE SECRETARY JENSEN: Rob Feckner? 6 CHAIRPERSON FECKNER: Good morning. 7 COMMITTEE SECRETARY JENSEN: Theresa Taylor? 8 VICE CHAIRPERSON TAYLOR: Here. 9 COMMITTEE SECRETARY JENSEN: Margaret Brown? 10 COMMITTEE MEMBER BROWN: Present. 11 COMMITTEE SECRETARY JENSEN: Henry Jones? 12 COMMITTEE MEMBER JONES: Here. 13 COMMITTEE SECRETARY JENSEN: Fiona Ma represented 14 by Matt Saha? 15 ACTING COMMITTEE MEMBER SAHA: Here. 16 COMMITTEE SECRETARY JENSEN: Lisa Middleton? 17 COMMITTEE MEMBER MIDDLETON: Present. 18 COMMITTEE SECRETARY JENSEN: David Miller? 19 COMMITTEE MEMBER MILLER: Here. 20 COMMITTEE SECRETARY JENSEN: Stacie Olivares? 21 COMMITTEE MEMBER OLIVARES: Here. 22 COMMITTEE SECRETARY JENSEN: Eraina Ortega? 23 COMMITTEE MEMBER ORTEGA: Here. 24 COMMITTEE SECRETARY JENSEN: Jason Perez? 25 COMMITTEE MEMBER PEREZ: Here.
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1 COMMITTEE SECRETARY JENSEN: Mona Pasquil Rogers? 2 COMMITTEE MEMBER PASQUIL ROGERS: Here. 3 COMMITTEE SECRETARY JENSEN: Ramon Rubalcava? 4 COMMITTEE MEMBER RUBALCAVA: Here. 5 COMMITTEE SECRETARY JENSEN: Betty Yee? 6 COMMITTEE MEMBER YEE: Here. 7 CHAIRPERSON FECKNER: Thank you. 8 The next order of business will be to approve the 9 Committee timed agenda. What's the pleasure of the 10 Committee? 11 VICE CHAIRPERSON TAYLOR: Move approval. 12 COMMITTEE MEMBER MILLER: Second. 13 CHAIRPERSON FECKNER: Moved by Taylor, seconded 14 by Miller. 15 Any discussion on the motion? 16 Seeing none. 17 All in favor say aye? 18 (Ayes.) 19 CHAIRPERSON FECKNER: Opposed, no? 20 Motion carries. Thank you. 21 Item 3, the Investment Education Workshop. 22 Mr. Meng. 23 (Thereupon an overhead presentation was 24 presented as follows.) 25 CHIEF INVESTMENT OFFICER MENG: Thank you, Mr.
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1 Chair. Good morning, members of the Investment Committee. 2 So today, we continue with our Board education workshop. 3 And we are actually honored to have two distinguished 4 guest speakers with us today. 5 So first, we have -- I will introduce the first 6 speaker and then my colleague Dan Bienvenue will introduce 7 the second speaker. 8 So the first guest speaker we have is Mr. Hiro 9 Mizuno, the Chief Managing Director and Chief Investment 10 Officer of Japan -- the Government Pension Investment Fund 11 of Japan, the GPIF, the largest pension fund in the world 12 and one of the largest pool of assets in the world. 13 You have his bio in front of you. And I was 14 trying -- I was hoping to find an abridged version of his 15 bio on Google. And that was a mistake last night. 16 (Laughter.) 17 CHIEF INVESTMENT OFFICER MENG: It goes on pages 18 after pages. It's sufficient to say that, you know, Mr. 19 Mizuno joined GPIF in January 2015. And since then he has 20 served as the Executive Managing Director and Chief 21 Investment Officer. And prior to joining GPIF he was a 22 partner of Coller Capital, a London-based private equity 23 firm. 24 Later you will see that in his presentation, his 25 experience working as a GP in the private equity industry
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1 has really benefited him and the GPIF in terms of 2 designing their program. And also as you will learn later 3 that GPIF managed almost all, if not all, the assets by 4 external managers. 5 So the relationship between GPIF and the GP 6 communities is of more critical importance to them. In 7 contrast, we manage about 80 percent asset in-house, but 8 still we have 20 percent asset manage externally so we can 9 really learn a lot from Hiro's creative thinking in terms 10 of designing long-term alignment in terms of economic 11 interest with the GPs, and also in terms of applying ESG 12 principles. And in the time horizon how to become a 13 long-term investor when we engage external partners. 14 Before he joined the private equity firm, he 15 worked at Sumitomo Trust Bank in Japan, Silicon Valley, 16 and in New York. He's also a member of the Board and 17 Asset Owner Advisory Committee of PRI, co-chair of the 18 Milken Institute of Global Capital Markets Advisory 19 Council. He's also the founding member of Climate Finance 20 Leadership Initiative, the Global Investors for 21 Sustainable Development, Alliance Member, and Global 22 Business Coalition for Education Advisory Board Member, 23 and also Asia Advisory Group Member of Climate Action 24 100+. 25 And as you see that these are the activities at
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1 CalPERS. We have been actively engaging, and Hiro and 2 GPIF has been a great partner with us on these important 3 global initiatives. So for that, we want to thank him and 4 GPIF for their great partnership working with us. 5 I could go on. You know there's a long list of 6 his -- also participation with Japanese government at 7 different levels, and also his involvement with the 8 academic community. So it's suffice to say that his -- in 9 addition to be one of the global leader, as a 10 practitioner, he's also a global leader in academic, the 11 thought leader as well. 12 So without further ado, I will turn over to Mr. 13 Mizuno who will share with us on how to design a long-term 14 relationship with GPs to align with the economic terms and 15 our value. 16 So with that, please put a round of applause 17 together. 18 (Applause.) 19 MR. MIZUNO: Good morning ladies and gentlemen. 20 And it's my real privilege to be able to present GPIF and 21 our strategy to world famous CalPERS Board. I cannot -- I 22 cannot help calling you judges, because you are appear to 23 be like judges to me. So it's a bit intimidating, but I 24 try not to be intimidated and try to be open to share with 25 you what we are trying to achieve at GPIF. And also as
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1 Ben mentioned, we regard CalPERS as our most important 2 strategic partner. And we also think we are most alike 3 with each other, because they are -- when we talk about 4 the business model of the public pension fund global asset 5 owners, a lot of people try to compare GPIF with the other 6 CPPIB, Canadian, or like Norges and some Scandinavians. 7 But they're working in very different regulatory framework 8 or environment. 9 So I always feel like CalPERS -- and also the -- 10 I saw the other -- my friend from CalSTRS in the audience, 11 but we -- I always feel like CalPERS and CalSTRS are our 12 closest allies in terms of the environment we operating, 13 and the -- sort of the significance in their and our 14 capital markets. So I, first of all, want to express my 15 gratitude for a continuous relationship and a partnership 16 between GPIF and CalPERS. 17 So today, I really don't know exactly what 18 interest the Board -- the CalPERS Board about what we have 19 been doing. So let me start with the introduction of GPIF 20 to you, who we are and how we operate. And I think there 21 maybe interest -- is of interest of CalPERS Board how the 22 Board should or would work with the investment team to 23 optimize our performance. 24 --o0o-- 25 MR. MIZUNO: So let me start with a quick
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1 snapshot of us. We at the moment managing the 1.5 or 1.6 2 trillion U.S. dollar - we're also public - pension reserve 3 fund. And our performance since we started our market 4 investment has been like annualized return 3 percent. And 5 we made, you know, roughly 621 billion U.S. dollar gain 6 since we started. 7 And as you see the graph accumulating -- 8 accumulated the gain, you can see there's a huge pick up 9 over the last five years, which is because we changed our 10 policy asset mix when I arrived at GPIF from 75 percent in 11 the fixed income, and mostly in Japanese government bond, 12 to 50 percent in global equities and 50 percent in global 13 fixed income. 14 And we got approval to invest into the 15 alternative assets up to 5 percent when we revised the 16 policy asset mix. But unfortunately, at the moment, we 17 are still -- have only less than 1 percent exposure to 18 alternative asset classes. And I was actually on the 19 other side when the GPIF decided and approved the -- our 20 current policy asset mix. 21 And there's a big argument that the GPIF should 22 have like a 20 percent exposure to private equity and real 23 assets. And, you know, I spent 20 years of my 24 professional career managing private equity. And before I 25 was called back by Prime Minister to run this fund, I was
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1 a partner of the -- one of the private equity funds which 2 CalPERS used to maybe still invest in. And then I knew 3 how difficult to deploy a huge amount of money in a 4 private market. That's why we agreed to have a -- not 5 even have a 5 percent allocation, but a 5 percent cap. 6 And at the moment, we haven't even reached 1 7 percent, which is -- for us is not a small amount of 8 money. 9 --o0o-- 10 MR. MIZUNO: So this has been what we have been 11 operating. And as I just described, our policy asset mix 12 now 50 percent in global equity, and 50 percent in global 13 fixed income, and 35 percent we have to invest in Japanese 14 domestic bond, which is mostly Japanese government bonds. 15 --o0o-- 16 MR. MIZUNO: And given this allocation and the -- 17 our fund size, we usually say we own about 8 percent to 10 18 percent of Japanese listed companies, and we own about 1 19 percent of the major U.S. companies. So our exposure to 20 U.S. economy is quite significant. 21 And in this context, I think CalPERS and GPIF are 22 one of the biggest owner of the U.S. public equities, 23 meaning we are owner of the U.S. economy. So it's very 24 important for us that the U.S. economy continue to have 25 the healthy growth. And I'm going to talk about it later,
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1 but our universal ownership approach meaning we are the 2 biggest beneficiary of economic growth or healthy 3 commercial activities. So that's why we need to 4 contribute to make the whole system more sustainable. 5 And that's the concept that came from this asset 6 allocation, which we ended up owning whole capital market. 7 --o0o-- 8 MR. MIZUNO: So just to give you a snapshot of 9 who we are from different angle. We are the manager of 10 the Japanese Public Pension Reserve Fund. Why we need a 11 reserve? Japanese pension scheme -- public pension scheme 12 that's actually -- actually designed as a pay-as-you-go 13 scheme. But the problem is for the pay-as-you-go scheme 14 pension scheme to be sustainable, we need to have younger 15 generation to support retirees. But as you know, Japan is 16 going through the huge aging, you know, transformation. 17 And for the next, you know, 100 years, we're probably 18 going to suffer from the other reverse age pyramid. 19 So we don't have enough young people to support 20 the pay as you go system. So, you know, 15 years ago, I 21 guess, like Japanese government came up with a very 22 audacious experimental, the idea of, you know, the hybrid 23 mechanism, which is -- basically is pay-as-you-go system. 24 But for the next 100 years, until the age pyramid 25 go back to normal, they make the best use of the fund, all
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1 of the -- you know, the saved or contributed from the 2 other -- the previous generation. So that's the fund GPIF 3 is managing. So always make a return from this reserved 4 fund to fill the gap, so that the -- our younger 5 generation is not going to suffer from too much burden to 6 support the older generation. 7 --o0o-- 8 MR. MIZUNO: So this is actually the graph trying 9 to illustrate how important GPIF fund is. You can say 10 that it's not as important or it's still very important. 11 For the next 100 years, this -- the chart describes the -- 12 how much money the public pension scheme have to pay out 13 to retirees. And GPIF's fund is going to account -- be 14 responsible about 10 percent of future liability of 15 Japanese public pension scheme. 16 As you can imagine from our -- you know, the 17 aging society, even last year, our public pension scheme 18 paid out about $600 billion. And we are still at the 19 entrance of aging society. So you can see the magnitude 20 of the problem caused by aging society. And so the GPIF 21 is meant to, you know, bridge the gap, so pay out the 22 other 10 percent of the future liability. And we are 23 designed to disappear in 100 year's time. 24 --o0o-- 25 MR. MIZUNO: So coming to back to the -- our
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1 governance structure, which I think may be interesting to 2 the CalPERS Board. GPIF is under supervision of Ministry 3 of Health Care, Labour and Welfare. Because historically, 4 the pension was regarded as the labor welfare. So we are 5 under supervision of Ministry of Health Care and Labour -- 6 Labour and Welfare. 7 And we have a board of governors, which consists 8 of 10 representatives, and which all appointed by the 9 Minister of that -- the Ministry. And now we have 10 10 members. And today, I was impressed to see like, you 11 know, gender diversity on the CalPERS Board. We only have 12 the 20 percent of the female represented out of 10. But 13 the -- naturally, women tend to live longer in Japan, so 14 there probably is some time that we will lose one men 15 representative, so... 16 (Laughter.) 17 MR. MIZUNO: But I think that the -- we are the 18 supporting member of the Thirty Percent Coalition. I feel 19 embarrassed every time we have only -- like I tell them, 20 we have only 20 percent female representative on our 21 board. But we have a board of governors, who make all the 22 strategic and high level decisions, namely, policy asset 23 mix. And we also need to get their approval when we start 24 new investment style or new invest -- new asset class. 25 And we have a clear, you know, separation of governance of
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1 execution. And I'm Executive Managing Director and the 2 CIO responsible for the Investment Office. 3 And then we started this new governance structure 4 about two years ago. Before, there's a huge criticism, 5 like, you know, the GPIF is operating under political 6 pressure, which was not really the case, because I never 7 felt political pressure when I make an investment 8 decision. 9 But there's a perception among Japanese -- the 10 public that, you know, the GPIF is under political 11 pressure to make some particular investment. So because 12 of those concerned, the Government came up with a new 13 governance structure, which was put in place about two 14 years ago and we are operating in that -- the governance 15 framework. 16 I'd like to talk about the philosophy and, you 17 know, strategy how to promote the long-termism. But I'm 18 happy to take questions, if you want to ask me about our 19 governance structure or, you know, about the GPIF, so that 20 you'd probably be able to understand the -- my you, you 21 know, remaining presentation better. 22 CHAIRPERSON FECKNER: Very good. Thank you. 23 Ms. Taylor. 24 VICE CHAIRPERSON TAYLOR: Thank you. See, I told 25 you, we ask questions.
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1 I was curious you said the -- you had some 2 political pressure, the government -- 3 MR. MIZUNO: No, I didn't. 4 VICE CHAIRPERSON TAYLOR: Not you, but I mean, 5 the pension system. What was the structure as opposed to 6 the new structure that was put in place? 7 MR. MIZUNO: Well, we used to have the -- what 8 they called Investment Advisory Committee as the other -- 9 the counsel to GPIF. 10 VICE CHAIRPERSON TAYLOR: Okay. 11 MR. MIZUNO: The other Board of Governors meant 12 to divide us from the political leadership. 13 VICE CHAIRPERSON TAYLOR: Oh, I see. Okay. 14 MR. MIZUNO: That's the whole purpose of this, 15 the new governance structure, so -- 16 VICE CHAIRPERSON TAYLOR: Okay. 17 MR. MIZUNO: And I forgot to mention, but the ten 18 representatives, two came from like, you know, finance or 19 investment professional or academics, and two from the -- 20 two are former central bankers, and one representing the 21 other business federation, or like a Chamber of Commerce 22 kind of things, and the one representing biggest labor 23 union, and one representing -- I mean, one is a lawyer, 24 the other is a CPA. So that's the sort of composition of 25 our Board of Governors.
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1 VICE CHAIRPERSON TAYLOR: And they're all 2 appointed? 3 MR. MIZUNO: They are all appointed by Minister. 4 VICE CHAIRPERSON TAYLOR: By the Minister. 5 MR. MIZUNO: Yeah. 6 VICE CHAIRPERSON TAYLOR: Okay. And then I 7 was -- what I'm seeing here is it looks like you -- what's 8 your rate of return, is that the 3.3 percent? 9 VICE CHAIRPERSON TAYLOR: Yeah. Well, we are 10 required to make 1.7 percent plus real wage increase with 11 minimal risk. And I really don't think that's the best 12 way to describe -- that is the best instruction to give to 13 the investment team, but that's what the -- we are 14 operating with. 15 So if we make the 1.7 percent over real wage 16 increase, that should satisfy that 10 percent, you know, 17 the responsible, you know, the 10 percent of the benefits. 18 VICE CHAIRPERSON TAYLOR: The reserve fund that 19 you're talking about, that's what -- 20 MR. MIZUNO Hmm? 21 VICE CHAIRPERSON TAYLOR: You're saying that 22 should satisfy the reserve fund? 23 MR. MIZUNO: Yeah, that's right. 24 VICE CHAIRPERSON TAYLOR: Okay. So you guys are 25 fully funded, is that what I'm assuming?
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1 MR. MIZUNO: Yeah. Well, it's tricky to say 2 fully funded, because it's a pay-as-you-go scheme. 3 VICE CHAIRPERSON TAYLOR: Right. 4 MR. MIZUNO: And as you see, the -- this graph -- 5 you know, this government contribution is -- basically, 6 it's a tax. So it's very difficult to describe whether we 7 are fully funded or not, because the -- that actually take 8 it into account, they will get a subsidy from the tax -- 9 you know, the account. And then also the other annual 10 pension premium paid by the other working generation, and 11 then reserve fund. 12 VICE CHAIRPERSON TAYLOR: And we have -- and you 13 have that discrepancy now between aging population and a 14 much smaller population contributing into the fund. 15 That's what I was curious about, because it 16 sounds to me like we have a similar -- kind of similar 17 situation with our aging population. We don't have a 18 pay-as-you-go scheme necessarily, because we have to hit a 19 certain rate of return to make sure, and be fully funded 20 to make sure that we pay our benefits. 21 MR. MIZUNO: Yeah, I think the -- I think the -- 22 for the next 25 years, we have net inflow of the capital. 23 And after that, we will be getting to the real serious 24 like distribution more. And so I think that compared to 25 Ben, one of very few privileges I have is I probably don't
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1 need to worry about the payout for the next 25 years, so 2 we can just focus on more long-term investment. 3 CHIEF INVESTMENT OFFICER MENG: Yeah. So as Hiro 4 said, there are a few key differences between us and GPIF. 5 One is the current liability, as Hiro just said, at least 6 for the next 25 years, they don't have projected current 7 liability payout. Currently, we pay out more than $20 8 billion a year. 9 And the other thing that as Hiro just mentioned, 10 GPIF is designed to go away in 100 years. So there's a 11 termination date. CalPERS, our fund, we don't have a 12 termination date. It's a perpetual. Supposed to be a 13 perpetual fund. So these are the key differences. 14 And also, as you point out, our required rate of 15 return is 7. It's much higher than their required rate of 16 return. But that difference aside, there's still a lot of 17 things we can learn and benefit from there. 18 VICE CHAIRPERSON TAYLOR: Oh, yeah. Yeah. I'm 19 just trying act -- trying to help -- figure out the 20 similarities, as well as I didn't realize -- I think I 21 took it differently when you said there was 100-year date. 22 So why would the pension system go away in 100 years. 23 Have you guys -- 24 MR. MIZUNO: No, the GPIF will go away, but the 25 pension scheme will continue obviously.
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1 CHIEF INVESTMENT OFFICER MENG: So the whole -- 2 MR. MIZUNO: You know, the other -- now, we have 3 the age pyramid, which is almost like a pillar. 4 VICE CHAIRPERSON TAYLOR: Oh, yeah. 5 MR. MIZUNO: And then going into the other 6 eight -- the reverse age pyramid. And that then those 7 generations will die and it go back into normal pyramid, 8 right? 9 VICE CHAIRPERSON TAYLOR: Okay. 10 MR. MIZUNO: The Japanese government project 11 it -- that transformation will take another probably next 12 100 years. And during that period, the burden on the 13 younger generation is going to be unbearably heavy. 14 VICE CHAIRPERSON TAYLOR: Right. 15 MR. MIZUNO: So that's why they came up is the 16 idea of the other -- using this reserve fund, which I'm 17 managing to fill the gap -- 18 VICE CHAIRPERSON TAYLOR: Got it. 19 MR. MIZUNO: -- so that the other younger 20 generation wouldn't suffer outrageously the other pension 21 burden to pay to the retired people. 22 VICE CHAIRPERSON TAYLOR: Okay. 23 CHIEF INVESTMENT OFFICER MENG: So basically the 24 hope is that within 100 years, Japan will be able to 25 reverse the aging trend.
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1 VICE CHAIRPERSON TAYLOR: Right. Right. Okay. 2 MR. MIZUNO: Yeah. That's a bold assumption of 3 them. 4 (Laughter.) 5 VICE CHAIRPERSON TAYLOR: Let's hope so. 6 MR. MIZUNO: I hope so, too. 7 VICE CHAIRPERSON TAYLOR: Thank you. 8 CHAIRPERSON FECKNER: Thank you. 9 Ms. Yee. 10 COMMITTEE MEMBER YEE: Thank you, Mr. Chairman. 11 And welcome, Hiro. It's really wonderful that 12 you're here. I had a question. Since you're a national 13 fund and you talked a little bit earlier in your 14 introductory remarks about our -- the differences in our 15 regulatory framework. So who regulates you? 16 MR. MIZUNO: The Ministry of Health, Labour, and 17 Welfare. 18 COMMITTEE MEMBER YEE: Okay. And so -- and part 19 of why I'm asking is that I know you really did some great 20 work in terms of corporate governance improvements and 21 reforms. And so are those policies advisory that come 22 down from the government of Japan or are you self 23 regulating? I'm just trying to get a sense of where 24 those -- how you treat advice and mandates? 25 MR. MIZUNO: Yeah. Well, that's the -- that's a
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1 very good question, Betty. And I try to answer the 2 question as effectively as possible. 3 When -- let's take the ESG as an example. 4 COMMITTEE MEMBER YEE: Yeah. 5 MR. MIZUNO: Four years ago, we started a 6 campaign to integrate ESG into our investment strategy. 7 And we started calling for the corporates to align their 8 business with the -- all those ESG requirements. At that 9 time, we received the criticism from some media, like I'm 10 under pressure by the Abe administration, if we are trying 11 to promote the corporate governance reform, and that's why 12 I'm doing it. 13 And I keep refusing that argument, saying like, 14 you know, I think taking ESG into the investment analysis 15 make 100 percent financial sense and nothing to do with 16 the Abe administration want to promote the corporate 17 governance reform. 18 But, you know, that's the kind of the general 19 perception which we struggle with. So to address that 20 kind of misperception, government came up with that 21 governance structure trying to make us look like as 22 distant as possible from the other -- the policymakers. 23 But in reality, I never brought the policy agenda 24 into my investment decision whatsoever. And ESG 25 integration, ESG campaign for me, it just really makes
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1 sense for -- as a universal owner to protect our fund from 2 the capital market volatility, or like a system risk, we 3 are facing like climate change. 4 COMMITTEE MEMBER YEE: Yeah. 5 MR. MIZUNO: I think the story -- I couldn't 6 sharply answer your question, but the -- it's nothing to 7 do with the other Abe administration's policy that GPIF 8 promote corporate governance reform of Japanese 9 corporates. 10 COMMITTEE MEMBER YEE: Okay. Yeah, that's a good 11 example. 12 And then with respect to your assets, how much of 13 it is internally and externally managed? 14 MR. MIZUNO: We are regulated not to take any 15 equity investment in-house. So the 100 percent of equity 16 portfolio is managed by external money managers. And for 17 the fixed income, we actually can manage all the fixed 18 income in-house. But as -- we made a strategic decision 19 to only manage domestic fixed income in-house. So 100 20 percent of the fixed income and 100 percent of global 21 equity portfolio are managed by our external managers. 22 COMMITTEE MEMBER YEE: Okay. All right. Thank 23 you. 24 MR. MIZUNO: Okay. 25 CHAIRPERSON FECKNER: Thank you.
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1 Mr. Perez. 2 COMMITTEE MEMBER PEREZ: Mr. Mizuno, thank you 3 for coming. 4 On one of your slides, I show three tiers for 5 employees. Can you walk me through, please -- 6 MR. MIZUNO: This one? 7 COMMITTEE MEMBER PEREZ: Yes, sir. 8 So if I'm a new employee, where does -- 9 MR. MIZUNO: Okay. We are like the U.S. 10 Social -- you know, Social Security. So it's a national 11 pension, whether they are student, or whether they are 12 working for the company, or they are self-employed, or 13 they are -- they make -- you, know they are homemakers, 14 regardless of their -- you know, their jobs, they are part 15 of this national pension scheme. So literally every 16 single Japanese are beneficiaries for this national 17 pension scheme. 18 And on the top of national pension scheme, we 19 have employee's pension, but this is mandatory. And GPIF 20 manage the fund contributed by those national pension, as 21 well as the mandatory employee's pension or corporate 22 pension. And the big corporates, like Toyota and Nissan, 23 those guys, they have their own -- the pension on the top. 24 So they're -- that third layer is up to the person or the 25 company you work for.
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1 So not everybody has the luxury of having that 2 start -- that layer. But every single Japanese has the 3 other -- the first tier -- or first layer. And the people 4 who work for the corporates also entitled for the 5 mandatory. That's the second tier pension scheme. 6 COMMITTEE MEMBER PEREZ: And the national 7 pension, that's the tax you referred to? 8 MR. MIZUNO: Hmm? 9 COMMITTEE MEMBER PEREZ: The national pension for 10 everybody, the basic -- the basic pension -- 11 MR. MIZUNO: Yeah, this is basic pension. This 12 is Social Security. 13 COMMITTEE MEMBER PEREZ: The tax you referred to 14 earlier? 15 MR. MIZUNO: Attach? 16 COMMITTEE MEMBER PEREZ: The tax. 17 MR. MIZUNO: Well, this is not tax, but they are 18 collected together with tax. So, you know, those -- like 19 that graph I showed that the subsidy came from -- the 20 government came from the general tax account. And the 21 middle layer, it was like directly contributed by the 22 other taxpayers, but it's collected together with tax. So 23 a lot of Japanese people think that the pension 24 contributions is also money like a tax. Yeah. 25 COMMITTEE MEMBER PEREZ: And the employee's
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1 pension, is that the employee paid or is that -- 2 MR. MIZUNO: It's half-half. Yeah. So the 3 other -- basically, the corporate have to match the 4 contribution but their employees. 5 COMMITTEE MEMBER PEREZ: Thank you. 6 And then what's your staff size and your 7 operating budget? 8 MR. MIZUNO: That's a good question. We have 9 only 135 people working. We don't have the administration 10 side of CalPERS. So basically it's Investment Office we 11 have 135. And our cost of operation is very low, but we 12 paid about $500 million to the asset manager to manage our 13 portfolios. So it's just -- you know, it's just a 14 strategic decision and also regulatory preference for GPIF 15 not to manage the equity in house. Because if you think 16 about it, we own about 10 percent of Japanese corporates. 17 And now our relationship with the Japanese corporate 18 community is very, very, very positive. 19 But four years ago, when I was called by, you 20 know, Japanese government to leave London private equity 21 shop to run this fund, Japanese corporate was very 22 skept -- very concerned about GPIF becomes like, you know, 23 the private equity fund manager. 24 So the regulator made it clear GPIF is not going 25 to manage the equity portfolio themselves. So that we're
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1 not going to be sort of like a dominant shareholder in a 2 Japanese -- in the public -- private sector. So that's a 3 background why we don't take any investment in-house. 4 COMMITTEE MEMBER PEREZ: Thank you very much. 5 MR. MIZUNO: Thank you. 6 CHAIRPERSON FECKNER: Thank you. 7 Mr. Jones. 8 COMMITTEE MEMBER JONES: Yeah. Thank you, Mr. 9 Chair. Good to see you again, Hiro. 10 MR. MIZUNO: Good to see you. 11 COMMITTEE MEMBER JONES: Yeah. As you know, 12 CalPERS has substantial investments in Japan. And maybe 13 right before you came, I was with a group that had went to 14 Japan to talk about corporate governance, because we were 15 concerned about our investments in Japan. 16 So I know that you've implemented a strategy on 17 the corporate governance now. So could you kind of give 18 us an update where you are in that strategy? 19 MR. MIZUNO: Sure. It's probably -- it's 20 probably makes sense for me to go through our ESG 21 initiatives to address your question more clearly, because 22 we never separate like a corporate governance issue from 23 like the other issues, like social, and environmental 24 issue, because we promote ESG investment altogether. 25 So for us, corporate governance is one of ESG
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1 issues, rather than a one specific issue. So let me -- if 2 you run out of questions on the who GPIF is, I probably 3 wanted to just move on to the other slide to address the 4 Henry's question better. 5 COMMITTEE MEMBER JONES: Right. Okay. That's 6 fine. That's fine. Okay. 7 MR. MIZUNO: Mr. Chair. 8 CHAIRPERSON FECKNER: You done, Mr. Jones? 9 COMMITTEE MEMBER JONES: Yeah. Oh, no, I do have 10 another one. Go back to the chart that shows the 11 governance structure. The audit committee, it says that 12 the -- it's the same body of members that are part of the 13 Board of Governors that's part of the audit committee. So 14 what's your relationship to the audit committee and do you 15 have an internal audit committee. 16 MR. MIZUNO: We do have an internal auditor as 17 well, so -- but this is -- this is only one committee like 18 board has. Like CalPERS gets, they have Investment 19 Committee as well as the -- what's other one? 20 COMMITTEE MEMBER JONES: Health. 21 INVESTMENT DIRECTOR SIMPSON: Pension and Health. 22 MR. MIZUNO: Pension and Health, the committee. 23 For GPIF it's only one committee the Board has is the 24 audit committee, who works as sort of semi-external 25 auditing board. And also one permanent board member is
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1 stationed in our office to report to that audit committee. 2 So it's very rare for me to work directly with audit 3 committee, but audit committee works as a bridge between 4 investment team and board. 5 So I don't -- you know, GPIF meet with our board 6 every month, but only for two hours. So it's not like 7 CalPERS. I don't know how many days you meet every month, 8 but we meet like -- 9 INVESTMENT DIRECTOR SIMPSON: Three. 10 MR. MIZUNO: Yeah, three days. Our case, two 11 hours or three hours. So this like audit committee 12 function as the sort of liaison between the investment 13 team and a board, so that we don't need to, you know, 14 report everything in detail to our board. 15 COMMITTEE MEMBER JONES: Thank you. 16 MR. MIZUNO: Thank you. 17 CHAIRPERSON FECKNER: Mr. Miller. 18 COMMITTEE MEMBER MILLER: Yeah. Thank you for 19 taking the time to spend with us, sir. Really appreciate 20 it. 21 I'm kind of curious, you know, for us having kind 22 of direct engagement with our beneficiaries and the 23 members we serve is a big part of kind of the 24 transparency, and accountability, and results equation for 25 us, and things like this generational equity issues that
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1 are really important to them. So for you in your system, 2 what's that relationship with the members, the 3 beneficiaries like? Is that through the Board of 4 Governors or through the voice of the customer via the 5 government, or do you interact directly with them in some 6 ways? Like you can see in our audience, we always have 7 very active members and organizations to communicate with 8 us. 9 MR. MIZUNO: Thank you. That's a very good 10 question and very important question for us. And when we 11 have been discussing -- we were discussing about this new 12 governance structure, that was one of the topic this being 13 discussed very heavily, because now it used to be GPIF 14 investment team was also responsible policy asset mix. So 15 the other investment team before this new governance 16 structure felt full-heartedly responsible for the 17 performance. 18 But now -- actually, they picked the -- pick up 19 the CalPERS motto and the Governor -- Board of Governors 20 decided policy asset mix. So to be fair, 80, 90 percent 21 of performance was actually dictated by the Board 22 decision. 23 INVESTMENT DIRECTOR SIMPSON: Yes. 24 MR. MIZUNO: But in reality and in real world, 25 nobody hold that board accountable for the performance.
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1 It's going to be investment executive. So nobody want to 2 listen directly from our board about our investment, so 3 it's got to be us who try to communicate with general 4 public how we manage. 5 That's something I always feel unfair to be 6 honest. But -- 7 CHIEF INVESTMENT OFFICER MENG: You're not alone. 8 MR. MIZUNO: Yeah, we're not alone. 9 But the -- basically, board make those kind of 10 very, very critical investment decision. But when GPIF 11 tried to communicate with our stakeholder beneficiary, 12 which is Japanese general public or -- and also, usually, 13 we reach out to general public through media. Media only 14 interested in our explanation how we are managing it. So 15 we take the responsibility. 16 Given we don't have a target audience, it's 17 always really difficult to communicate and/or convey the 18 very clear message, because we have no idea who's 19 listening. And at least the CalPERS beneficiary, in my 20 opinion -- in my -- you know, the understanding, at least 21 served for the public -- you know, the -- you know, for 22 the local government. So the people seems to have the 23 public mindset, I guess. 24 But we are serving every single Japanese person 25 who has a totally different opinion from each other. So
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1 the communicating well with the general public is such an 2 impossible job for us. So we created a lot of like a 3 reports and we put everything on the Internet. We don't 4 broadcast the board meeting like you guys do, but we put a 5 lot of information on the -- on the homepage. But we 6 always get criticized we are not transparent enough, which 7 I think is impossible task to achieve. 8 And if you don't mind, I just wanted to just talk 9 about the transparency. Over the last four years, we 10 continue to increase our transparency. But as a result, 11 we haven't been able to affect the people's perception or 12 expectation of GPIF. So I concluded transparency itself 13 wouldn't solve the problem. 14 Okay. And I always feel like, you know, the 15 Board and the people, particularly people from the 16 investment industry or finance industry is expect the 17 investment team to outperform the market. But in reality, 18 if you take the analogy of NBA, like, you know, the 19 basketball team. CEO is like, you know, the head coach 20 and all of our conversation of our game plan with our 21 owner or executive has to be broadcasted. 22 Beating the market, managing a public pension 23 fund is almost impossible job. That's one thing I wanted 24 to just convey to the Board of CalPERS. You know, 25 transparency sounds good, but in reality, it, you know,
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1 really make investment team play handicapped game. 2 So we started discussing which area we should be 3 strategically transparent and which area which actually 4 information we should be trans -- you know, strategically 5 less transparent. I'm sure that the -- I understand that 6 at the CalPERS Board now the private equity is one of the 7 hot topic. I used to manage one of the biggest private 8 equity fund. 9 And private equity fund delivers better return. 10 Nobody argue about it. The reason why, because we are 11 playing the game of not transparency, you know, with a lot 12 of private information, right? 13 So on one hand, I think GPIF and CalPERS has to 14 continue to make effort to have better communication with 15 the stakeholders, but I would like to ask the -- our board 16 as well as the CalPERS Board to be empathetic to the 17 investment team who have to operate in that kind of 18 handicapped environment. It's really hard. 19 You know, we need to tell them our asset 20 allocation start. When we start discussing the new policy 21 asset mix, we under pressure from general public we need 22 to disclose it. It's very difficult to manage the fund in 23 that kind of circumstances. 24 If you don't request us to outperform the market, 25 it's fine. But all the board expect the investment team
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1 to outperform the market. And without, you know, the 2 operating with that kind of transparency requirement, it's 3 just impossible. 4 So I think the Board side -- Board and the 5 investment team need to work together to improve the 6 communication with the stakeholders. But increasing the 7 transparency doesn't seem to deliver what we are talking 8 about. So that's another reason I feel always empathetic 9 to the CalPERS, because we are under very similar pressure 10 by general public and also the media about what we are 11 doing. 12 COMMITTEE MEMBER MILLER: Thank you for your 13 insight, sir. 14 MR. MIZUNO: Thank you. 15 CHAIRPERSON FECKNER: Very refreshing to hear 16 those comments, so thank you. 17 MR. MIZUNO: Thank you. 18 CHAIRPERSON FECKNER: Ms. Middleton. 19 COMMITTEE MEMBER MIDDLETON: Okay. Thank you, 20 Mr. Chairman. And thank you, sir. It's a pleasure to 21 hear your insight. 22 I'd like to shift gears a bit. You've got 23 incredible experience in the global economy. As you look 24 forward over the next few years, in the next 25 years, 25 that what are the most significant concerns that you have
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1 that would cause major disruption to the global market 2 economy? 3 MR. MIZUNO: Thank you. That's a very good 4 question. And several issues I'm very concerned about. 5 You know, I think that -- Ben probably the same, but every 6 time I'm the panel at the conference, the moderator try to 7 ask me what may -- you know keeps me up at night? And I 8 always answer that it's Netflix -- 9 (Laughter.) 10 MR. MIZUNO: -- and YouTube, but -- 11 (Laughter.) 12 MR. MIZUNO: I watch the CalPERS Board media on 13 my way into the conference. It totally kept me awake 11 14 hours. 15 But the one is the aging society in a developed 16 market -- developed economy. You know, Japan has been 17 trying everything to get out of deflation over the last 18 two decades. We still haven't been successful. You know, 19 how much money Japan has got -- you know Bank of Japan 20 printed and how much stimulus Japanese government 21 implemented still we cannot get out of the deflation. And 22 it has to do -- it obviously has to do with the aging 23 society. 24 And the globalization of the economy and the 25 basically just made the other manufacturer's job
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1 impossible to -- you know, transfer the cost into the 2 final -- you know, the final, you know, consumer pricing. 3 So there's a huge pressure to keep the other -- you know, 4 the price down and inflation down. 5 And GPIF is now allocated 50 percent of our 6 portfolio to fixed income hoping fixed income portfolio 7 provide hedge for the other -- you know, the drawdown on 8 the equity portfolio. But last 4th quarter of 2018, GPIF 9 reported the -- it's only mark to market -- it's not real 10 loss. But the mark to market loss of $150 billion just 11 over three months. 12 You know why? I have been in this industry for 13 throughout my career. I look young, but I'm 53, so I have 14 significant experience in investment, okay? I have a 15 young looking gene. 16 (Laughter.) 17 CHIEF INVESTMENT OFFICER MENG: Keep working at 18 GPIF and you'll -- 19 (Laughter.) 20 MR. MIZUNO: I never had gray hair before I 21 joined GPIF. 22 (Laughter.) 23 MR. MIZUNO: But working for the public pension 24 fund, started growing -- I started growing gray hair. 25 (Laughter.)
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1 CHIEF INVESTMENT OFFICER MENG: Very try with me. 2 My mom just came to visit me a couple weeks ago. She 3 noticed you got white hair now. 4 (Laughter.) 5 MR. MIZUNO: I know. I know. 6 So what was I going to say? 7 Oh, the reason that we had to report the $150 8 billion loss over three months, I lost -- we lost as much 9 as the -- not as big as CalPERS, but the major U.S. public 10 pension fund has only $100 billion. So we lost as much as 11 major U.S. pension fund over three months. 12 The reason why was I never seen in my whole 13 career, as an investment professional, every single asset 14 class we lost money. Okay. Because conventional wisdom 15 of the portfolio diversification is like when we lose 16 money in equity, we make profit in fixed income, right? 17 But we lost in every single asset classes. And we also 18 lost in currency translation as well. It never happened 19 in the past. 20 So I think it has something to do with the 21 mandatory easing, all those kind of things, which we 22 actually created over the last decade and we are now, you 23 know, facing the situation global market is so linked. 24 You know, when we woke -- wake up and find out the New 25 York Stock Market, the -- you know, the plant, we --
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1 everybody expect the Tokyo market will go down as well, 2 right? 3 It used to create a global diversification. So 4 when the New York goes down, the Tokyo used to go up. But 5 now, every market move in the same direction. So this is 6 actually it's really concerning to me. You know, the -- 7 whether the conventional wisdom of the portfolio 8 diversification really save us? And no wonder why 9 everybody trying to increase the private -- you know, the 10 asset or like a private investment, because obviously, 11 it's not correlated to the public market. But that's 12 another thing. 13 And the third one is I still don't know whether 14 it's going to be a, you know, net positive or negative. 15 But the AI going to replace a lot of jobs, you know. But 16 when the car replaced the horses, I think a lot of horse 17 owners very concerned about it. But in the end, we 18 benefited from the car. 19 (Laughter.) 20 MR. MIZUNO: So I don't know, we may benefit 21 from -- like from AI. But for the time being we will see 22 the difference in some people win it -- you know, win with 23 that, and the other people will lose with it. 24 And -- but this impact of AI in the business is 25 going to be more significant than people think. So that's
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1 why one of the initiatives we are making is that work with 2 the Sony computer science laboratory to use AI to monitor 3 our asset management behavior. 4 So there's a lot of room for the -- our industry 5 to use AI. But, you know, if you think about it, this is 6 an industry where there are, you know, thousand of million 7 dollar bonus paid people. I really don't think that all 8 of them will managed to keep that kind of high 9 remuneration. 10 But to conclude my answer to your question, I 11 think the other -- how the AI will affect the industry 12 landscape is going to be the big topic, whether it's going 13 to be negative or positive. At the moment, I cannot 14 judge. 15 COMMITTEE MEMBER MIDDLETON: Okay. Thank you. 16 CHAIRPERSON FECKNER: Thank you. And I feel your 17 pain, Ben. When I started here, I had hair and this 18 wasn't white, so... 19 (Laughter.) 20 CHAIRPERSON FECKNER: Ms. Olivares. 21 MR. MIZUNO: Okay. So -- 22 INVESTMENT DIRECTOR SIMPSON: There's one more. 23 CHAIRPERSON FECKNER: Wait just a second. 24 Ms. Olivares. 25 COMMITTEE MEMBER OLIVARES: Hi. Thank you, Mr.
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1 Chair. 2 I wanted to understand better your performance 3 based fee structure. It's a little different. I find it 4 quite interesting. 5 MR. MIZUNO: You mean for the asset managers? 6 COMMITTEE MEMBER OLIVARES: Yes. 7 MR. MIZUNO: Okay. 8 COMMITTEE MEMBER OLIVARES: So if I understand 9 correctly, if an invest -- or an asset manager doesn't 10 perform in terms of reaching alpha, then they're paid 11 based on a passive index, is that correct? 12 MR. MIZUNO: Yeah. I think the -- our new fee 13 structure is -- has been very controversial, because 14 basically we challenge the industry saying like, you know, 15 active manager seems to be remunerated much better than 16 they should be. Not about the absolute level, but also 17 the fee structure is not really, you know, the -- align 18 our interest with asset managers. 19 So as you know, the active manager's performance 20 is conventionally measured their performance relative to 21 benchmark. 22 COMMITTEE MEMBER OLIVARES: Um-hmm. 23 MR. MIZUNO: And there is also the big debate in 24 the finance academics that the -- whether active 25 management will deliver any value or not. Because on
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1 average, you know, the -- as you know, the active 2 management has never beaten the other -- you know, passive 3 management, while they charge much higher fees. 4 COMMITTEE MEMBER OLIVARES: Right. 5 MR. MIZUNO: So through our GPIF's own 6 experience, you know, 80 percent of our investment team 7 resource was used to select the asset managers and monitor 8 them, et cetera. I mean, active managers. But in 9 reality, net of fees, historically our alpha net of fee 10 was zero. So that means we wasted our resource spending 11 energy on selecting active managers. 12 So -- but the conventional reaction to that was 13 you are not good at selecting good managers, right? So 14 it's your fault you selected bad ones. But in reality, if 15 you look at the statistic, active never, you know, beat 16 the market net of fees. So that's why we thought we need 17 to change the game, rule of the game, to make it possible 18 for us to win. 19 And the game -- the new rule of the game we 20 implemented was active managers should be only paid as 21 much as passive manager being paid, if they don't deliver 22 extra return. It's very simple. 23 (Applause.) 24 VICE CHAIRPERSON TAYLOR: Yeah. 25 MR. MIZUNO: Yeah, it's very simple. And then
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1 unfortunately, last year, GPIF managed to save $200 2 million in active management fee, because majority of 3 active managers failed to deliver target alpha, but it 4 will give us much better chance. When the market is 5 better, right, the -- we'll probably be able to get the 6 alpha out of the active management. And then when you 7 look at the long-term performance of our active portfolio, 8 we pay very little when the performance is low and we pay 9 higher when they make the other actual returns. 10 So the probability of GPIF winning from active 11 portfolio is now much better and also it makes a lot of 12 sense as you give me some, like applause, they shouldn't 13 be paid if they don't deliver something, which they 14 promised, right? 15 (Applause.) 16 COMMITTEE MEMBER BROWN: I agree. 17 MR. MIZUNO: Because unfortunately, I'm -- you 18 know, I would recommend you to read some of the white 19 paper about the fee proposal on our website. And it 20 illustrate what the discussion we had with the asset 21 managers, because at the beginning, all the asset managers 22 are trying to refuse it. They argued it's not fair. And 23 GPIF now is again trying to use our power to hammer the 24 fees. 25 But what we said was, first of all, if you don't
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1 deliver alpha, you are just as good as passive, right, so 2 you should be paid as -- you know, as good as passive. 3 And we designed the participation ratio to break even at 4 their target alpha, right? So if they deliver the alpha 5 what they proposed us, they should be paid as well, right? 6 So they are -- I told the asset managers it 7 doesn't make any sense you complain that we are trying to 8 hammer the fee, because if you deliver what you're 9 proposing, you're receiving exactly the same amount of 10 fees. 11 But throughout the GPIF's, you know, the history, 12 only 18 percent of our active managers ever deliver target 13 alpha. You know, when you select asset managers, and you 14 saw -- when you agree with your investment team, you ask 15 them, you know, how much alpha you are trying to achieve 16 by taking this risk, right? So that's called the target 17 alpha. 18 And suddenly throughout the GPIF's experience, 19 only 18 percent of our active manager ever deliver the 20 target alpha. So I said, this industry should be gone, 21 because, you know, the -- if this industry, only less than 22 20 percent of product performs as, you know, what it says 23 on the product box. That industry should be either 24 eliminated or underperformers should get out of the 25 competition.
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1 But we manage to -- you know, they manage to keep 2 the industry intact, while academics argue active 3 management don't deliver anything. I still believe human 4 can add value and active management can still add value, 5 but we needed to change the game -- the rule of the game, 6 so that we have better chance of winning and delivering 7 alpha. So that's the whole basic idea behind the other 8 fee structure. 9 COMMITTEE MEMBER OLIVARES: Can you show slide 10 28, which illustrates your point? 11 MR. MIZUNO: Yeah. 12 CHIEF INVESTMENT OFFICER MENG: So if I may add 13 something to Ms. Olivares question. So this is just one 14 of the many examples Hiro and GPIF has been the thought 15 leader in the industry. So this creative fee structure. 16 Once GPIF designed it, not only they use it to their own 17 benefit, they also put it out on their website as a white 18 paper. 19 And at that time, I was still working at SAFE. 20 So my senior emitted for me a copy of the paper, asked me 21 and the team to study. So that's go to say again that, 22 you know, Hiro and GPIF's commitment to the entire 23 industry, not to GPIF, to get better alignment for 24 long-term investors, such as GPIF and CalPERS. 25 Yeah. So the paper -- all the detail methodology
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1 is on its website. 2 COMMITTEE MEMBER OLIVARES: Thank you. 3 MR. MIZUNO: So this is the slide you want to put 4 on? 5 COMMITTEE MEMBER OLIVARES: Yes. 6 MR. MIZUNO: So actually this is the one of 7 very -- you know, the many initiative I -- we started. 8 And -- but the fee structure, which has been quite 9 controversial, but now -- actually, 43 out of 46 are asset 10 managers in the end agree to this. And three manager who 11 walked away, I directly discussed with their executive why 12 they don't accept this. 13 And one manager says, they have -- they don't 14 believe that they can ever deliver target alpha. And I 15 said why didn't you tell us two years ago, okay? 16 (Laughter.) 17 MR. MIZUNO: And then the other asset manager 18 says, you know, we agree with this concept, but we have 19 much easier money, right? Some of the other customers 20 willing to pay fixed fee. Why would they have to take the 21 GPIF? 22 So I think this type of initiative, as Ben 23 mentioned, I really call for the collaboration among asset 24 owner to make it as a -- like a more industry like a 25 practice.
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1 Another good example -- sorry, I just sort of 2 jump onto other issues, which is again transparency. When 3 I was a GP, we used to hate CalPERS, because CalPERS 4 disclosed everything. 5 And, you know, we used to say the private equity 6 market, like CalPERS is not the other -- you know, the 7 ideal customer, because once we partner -- we get the 8 CalPERS money, all the information will be disclosed. And 9 now, I mean, GPIF, I'm telling our GP, we are going to 10 disclose everything, because the point is when CalPERS is 11 only one, it will work against you guys. But if we join, 12 and if other people will join, it will become market 13 standard. 14 So some of those things, as I mentioned, we have 15 to be more strategic about the transparency argument. But 16 the -- there is something if GPIF, and CalPERS, and some 17 big asset owner decide to work together, we can affect the 18 market. That's the reason we posted this in a public 19 domain. Because when I started negotiating with the asset 20 manager, first thing they told me was -- ask me was are 21 you going to disclose this fee to the public? 22 And I knew my job would have been much easier if 23 we -- I had told them we are going to keep it secret to 24 negotiate a fee. But we told them, we are going to 25 disclose this, because we have a very strong, you know,
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1 the commitment to change the market practice. 2 So, you know, if the one party does it, it goes 3 against -- it works against them, but it will become the 4 industry practice -- you know, it will change the things 5 for the better -- for the better of everybody. 6 CHIEF INVESTMENT OFFICER MENG: Yeah. So this is 7 one example where Hiro mentioned early on strategic 8 transparency. So what we should be more transparent, 9 what -- where we should be less transparent, how to best 10 serve our fiduciary duty. So this is one example of 11 strategic transparency to the benefit of our 12 beneficiaries. 13 MR. MIZUNO: Yeah. So CalPERS is not going to be 14 alone to disclose the fee on the private equity, because 15 we are joining. But fee is okay, but the other things, I 16 mean, some transparency requirement which I used to hear 17 from some of the public pension fund including CalPERS, 18 which really affect the private equity money's ability to 19 deliver, you know, the outperformance. 20 And so in some of those areas, I think the 21 other -- the public pension fund board, I know, executive 22 team has to be more strategic. 23 But, you know, it's not about hiding, but some 24 other things that we probably be able to just come up with 25 more strategic approaches.
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1 So can I just go through some of the other -- you 2 know, the other initiatives we have been implementing, so 3 that I can -- you know, the -- invite some other 4 questions? 5 CHAIRPERSON FECKNER: Sure. 6 --o0o-- 7 MR. MIZUNO: So this is a snapshot of our ESG 8 investment. You know, the first thing I did when I came 9 into this position is to analyze who we are? And we are 10 trying to find the best role model of the -- you know, the 11 asset owner business model. And after three or four month 12 search -- or research, I concluded we need to come up with 13 a new theory or like a new business model, because nobody 14 actually, you know, give me the impression that, yeah, 15 this is going to be role model for us to mimic. 16 So the first thing we did was we're actually 17 trying to characterize who we are. And we concluded those 18 two key words should describe GPIF the best. One is 19 universal owner. The other is cross-generational 20 investor. 21 Universal owner is actually, you know, appeared 22 in classic finance textbook many years ago. But I was 23 told by Harvard Business School professor, GPIF probably 24 the first one to take that out into the -- out of textbook 25 into practice.
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1 So we basically own the wide universe of the 2 capital market. So, you know, the conventional wisdom of 3 the asset management we did how to beat the benchmark, how 4 to beat the market is not suitable for our -- you know, 5 for GPIF or CalPERS. We are a universal owner. Because 6 given our size, we won't be able to select, you know, only 7 the good performer or when we look at the ESG, you know, E 8 is a good example, climate. I'm against the idea of 9 divestment. The reason why is when we divest, ownership 10 of those programmatic company will be shift from the 11 responsible owner to irresponsible owner. 12 So it doesn't make any difference, because even 13 that business is outside of our portfolio. If they 14 continue to pollute the environment, we need to suffer, 15 right? So the universal owner should pay more attention 16 how to make the whole capital market a whole business, or 17 whole society more sustainable. That's going to -- 18 because that's going to affect our portfolio somehow, some 19 day. 20 So that's the one the characteristics of the 21 universal ownership. And when I spoke at the Harvard 22 Business School, some student asked me, well, GPIF, it's 23 easy to understand you are universal owner given your 24 size. But what if I'm a CIO of like a small -- you know, 25 the endowment of pension fund, should we act like other
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1 universal owner or not? 2 My argument was, as a community, we are universal 3 owner, regardless of your size, because you may be able to 4 outperform the market for the short period of time, but 5 the long period of time, you are basically owning the 6 global economy. So the universal ownership is a really, 7 really important key characteristic of GPIF. And also, I 8 think it should be suitable for the other asset owners. 9 And CalPERS, no doubt you are universal owner. 10 And the other one is a cross-generational 11 investor. We used to call ourselves long-term investor. 12 But when I was making a speech at the CFA Institute annual 13 meeting in Hong Kong, I asked the other panelists and also 14 audience what's your definition of long-term investment? 15 Yeah, well, the most common one is three years. 16 (Laughter.) 17 MR. MIZUNO: And the one young guy told me, I was 18 told by my boss that anything longer three days you should 19 take it as a long term. 20 (Laughter.) 21 MR. MIZUNO: Right? Because they are like hedge 22 fund. Okay. So I came to realize long term is so 23 subjective. And everybody seems to have a totally 24 different time frame when we say -- we say long term. 25 And then I started using super long term. And
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1 one person said, oh, for me super long time is three 2 months. Okay. I gave up on the long term. 3 (Laughter.) 4 MR. MIZUNO: So that's why -- and then we started 5 using a cross-generational investment, because are 6 managing money not for the first people who already 7 retired. We are managing money for the people who are not 8 born yet, right? 9 So that we are cross-generational investors. And 10 when we ae cross generational investors toss, everybody is 11 started thinking we are talking about a third 20, 30 years 12 minimum time frame. 13 And GPIF's poly asset mix designed to optimize 14 our performance over 25 years. And we are definitely at a 15 cross-generational investors so 16 So for the universal ownership characteristics 17 and for the cross-generational investor characteristics, 18 we concluded GPIF should pay much more attention to how to 19 make the capital -- whole capital market more sustainable. 20 So that's the other sort of backdrop of the -- 21 all of our ESG initiative. And we have been asked whether 22 taking ESG into account is against a fiduciary duty? And 23 I said fiduciary duty meaning, you should be loyal to your 24 beneficiaries. 25 And if we think we are universal owner,
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1 cross-generational investor, I cannot think of like, you 2 know, taking ESG information into our investment decisions 3 against our fiduciary duty. So we actually made that 4 statement very clear to our asset managers. 5 And funny thing is when I discussed with the 6 asset manager individually, everybody tells me ESG is 7 going to be -- it probably is already, but is going to be 8 the most important critical financial investment 9 information for their portfolio management. 10 And then argument is then practice it, because if 11 they think that transformation is going to happen over the 12 time, we want to be the first one to do that, right? 13 That's how we can make the better return. 14 So the GPIF is really committed to become the 15 ultimate ESG investor to make sure our whole capital 16 market is going to be sustainable. And the inconvenient 17 truth of the asset management is, you know, as I said, we 18 spend 80 percent of our resource trying to select the 19 active managers. And we made a huge effort to build 20 the -- you know, the alpha, or accumulate extra return. 21 But I don't know about the CalPERS, but my study is 22 showing all the asset owners effort to make extra return 23 every 10 years wiped out by financial crisis. That means 24 the beta is so important. 25 INVESTMENT DIRECTOR SIMPSON: Thanks very much,
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1 Hiro. I just wanted to flag a really practical example of 2 how GPIF and CalPERS are putting these ideas into 3 practice. And it's through tackling climate change, which 4 is systemic risk, also presents opportunity. But what 5 we've done is team up together and form a network of 6 what's now $34 trillion in investors that stretch from 7 Asia, Europe, North America. And what we're doing is 8 focusing on just over 100 companies where - again, we love 9 data just like you - when we did the analysis, Divya 10 Mankikar did this important work, we found that these 100 11 companies are responsible for the vast majority of the 12 emissions. 13 So in other words, we can focus our attention and 14 start to work with these companies. And our goal is a 15 transition to get to 2050, to get to net zero globally. 16 But we are confident that we can do this as long as we 17 work in partnership, as long as we're focused, as long as 18 we're long term. And we're already getting some big 19 results at huge oil companies like Shell, which has a 20 written agreement with us, and many others as well. 21 So I think what we're finding is that we can take 22 this idea that GPIF has, that we fix the market through 23 partnership and through engagement. If we walk away, we 24 don't get the chance to change things. You know, we just 25 have to go and hide in a corner and hope it all works out,
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1 but actually we need to fix it. And that's really what 2 fiduciary duty is it's getting things fixed. 3 So I just want to thank Hiro for his personal 4 commitment, because his role through our Asia Advisory 5 Group, which Hiro and I both sit on, is actually now 6 leading us to start looking at strategy for China based on 7 the success that you've led in Japan. I think it's a 8 very, very practical and a very, very fruitful way of 9 working together. 10 MR. MIZUNO: Yeah. 11 CHIEF INVESTMENT OFFICER MENG: And on the note 12 of ESG investing, as Hiro just mentioned, that it's 13 critical for us to catch the moment. But also with the 14 invention, we have to be mindful that in the Investment 15 Office is shared with a team and we're actively 16 researching this topic, when it's right. So I use the 17 surfing analogy, right? We definitely would like to catch 18 the wave, but you don't want to be too early in terms of 19 deploying capital. 20 If you're too early, you'll be, as Howard Marx 21 once said famously that, you know, if you're too much 22 ahead of your it's distinguishable from being wrong. But 23 we need to capture the wave. And if you're too early -- 24 if too late, we miss the wave. We may be crushed by the 25 wave. If we're too early, we have to take on too much
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1 risk -- tracking error risk and sometimes cost getting the 2 market ready. 3 But what we can do together -- and also ESG topic 4 is so broad. Some strategies may be ready for deploying 5 capital. Some strategies probably stay -- still warrants 6 monitoring, and research, and getting data. But we should 7 closely monitor when the wave is forming. And if the wave 8 is forming, we want to surf on top of that wave. And that 9 what we can do form together at the partnership 10 continue -- continue to be the advocates of these topics. 11 Educate the market the risk, so that we can create the 12 wave together. And so also we can surf together to 13 benefit from the moment and the benefits of our members. 14 So we just be a little bit cautious. ESG topic 15 is so broad and they're so different. So we had to apply, 16 depending on which topic we are talking about, which 17 stage? Are we in the stage of research, in the stage of 18 monitoring, or in the stage of actually deploying small 19 amount of capital. But regardless, we need to join 20 together to advocate these key long-term initiatives. 21 MR. MIZUNO: Can I say one thing about ESG 22 investment? I think the -- when I started advocating 23 internally about the ESG investment, there are a lot of 24 skeptics inside of my team. And I analyzed why they are 25 concerned or skeptical about ESG investment.
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1 And one reason I wound out was a lot of people 2 think delivering extra return is only way to satisfy 3 fiduciary duty. So the other -- whenever they discuss 4 about ESG, they try to, you know, address whether taking 5 ESG into the investment decision will deliver extra return 6 over the market. 7 All right. So we now pay a lot of attention to 8 index provider and quality of index, because, you know, we 9 use a lot of passive management like the CalPERS. Passive 10 management -- if you discompose the passive management, 11 it's -- basically, it's the index tracking and engagement 12 with a company, because they are actually the bigger owner 13 of the company, right? So that we demand over passive 14 management that actively engage with their portfolio 15 companies. 16 But basically, the passive management is a 17 composition of their index tracking and engagement. We 18 now urge our passive managers to engage more proactively 19 with the asset -- the portfolio companies, which CalPERS 20 do directly. 21 But this index tracking, I think historically, we 22 paid too little attention to index selection, because we 23 basic -- used to pick the -- whatever is the most popular 24 index as the policy index. But in reality, index provider 25 dictate what we ended up holding. So we started engaging
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1 directly with the index providers. And we tested several 2 ESG-themed weighted indices. And again, some people are 3 skeptical whether this will fix -- satisfy fiduciary duty 4 if we underperform the benchmark. 5 So we designed the benchmark to carry the same 6 return and the same risk level trying to, you know, prove 7 we are making the -- bringing all our financial expertise 8 to select the index, which is not going to lose to the 9 market, but obviously some index, as I show -- showed in a 10 slide underperform and the other overperformed. 11 But we keep sending a message to Japanese public, 12 GPIF, the ultimate goal of ESG index investment is to make 13 Japanese capital market more sustainable. 14 And because index has much more powerful effect 15 over the industry -- because active manager has a dilemma, 16 if they think this company is good because of the -- for 17 their ESG the qualification, and when the price goes up, 18 they need to sell it to realize the extra return. But the 19 passive manager, they tend to hold almost perpetually. So 20 they should be the biggest beneficiary of their long-term 21 sustainability of the businesses. 22 So that's why we have been very successful 23 communicating with Japanese general public. And last 24 year, there more than 4,000 newspaper article talking 25 about the GPIF ESG investment.
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1 CHIEF INVESTMENT OFFICER MENG: 4,000? 2 MR. MIZUNO: 400. 400. And almost every single 3 article were very supportive, because they like the idea 4 of GPIF trying to contribute to make the capital market 5 and Japanese -- the business as a whole more sustainable. 6 Okay. So that's the reason why we have to show some 7 negative performance relative to benchmark with the FTSE 8 Blossom Japan ESG Index. But that we didn't get much 9 criticism. 10 And the other thing I want to mention is like 11 fiduciary duty is one thing, but these days, as an 12 investor and a shareholder, we expect the corporate 13 executive to deliver a lot of different things. When I 14 faced the other asset managers who are skeptical about the 15 ESG 4 years ago, I asked them the question, what if your 16 portfolio company CEO tells you my job is pay you the 17 dividend, anything else I don't care? I'm a CEO of this 18 business. My job is to give you the shareholder return. 19 I don't care about the corporate -- the worker's welfare. 20 I don't care about the environmental impact. I don't care 21 about the gender diversity or social impact. How would 22 you react? 23 Every single asset managers of GPIF told me, they 24 cannot accept it. And if they cannot accept it, why they 25 think it's acceptable to ourselves?
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1 So I think the investor has a responsibility, but 2 it's not going to be mutually exclusive. We deliver 3 financial return, but we pay attention to those risks. We 4 achieve both. And we now expect the corporate executive 5 to achieve both. Of course, we should expect ourself to 6 achieve both. 7 So that's the other different way to take a look 8 at the ESG. But it makes 100 percent financial sense. 9 But I think beyond the financial, you know, justification, 10 we are demanding corporate executive do the same. And we 11 are going to demand ourself to deliver both. So that's 12 the other -- the highest level concept we're actually 13 trying to convey. 14 And sorry, Henry, I just forgot your question, 15 the corporate governance. 16 COMMITTEE MEMBER JONES: Yeah. 17 MR. MIZUNO: So the corporate governance we 18 regard as one of the major topics in the ESG. Every year, 19 we ask our asset managers which ESG topic you think are 20 critical and you are going to discuss or engage with their 21 portfolio company on those issues. So they give us a list 22 of the different like ESG issues. 23 And generally speaking, the list of the tops are 24 usually climate and gender diversity, those kind of 25 things. But as far as the our Japanese equity managers
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1 are concerned, the top lists are made of all the corporate 2 governance issues. So I think the -- a lot of the -- for 3 a lot of investors, one of the biggest weakness of 4 Japanese businesses are the weak corporate governance. So 5 that's actually where the Abe administration decided to 6 make a reform. But also the investor thinks that the 7 Japanese corporate governance is not as -- not very 8 strong. 9 So I think all our asset managers promise with 10 us, because we made -- make it very explicit in our 11 strategy principle, our asset managers should engage with 12 the portfolio company on critical ESG issues of their 13 choosing, right? 14 So if they choose for the Japanese companies, 15 corporate governance is the critical issue, they are 16 required to engage with that Japanese company on that 17 issue. 18 And one good observation to share with you was we 19 actually disclose this as well, but the -- now, we use 20 three different index provider of ESG indices FTSE and 21 MSCI and S&P. And we monitor the correlation between the 22 other -- the ESG rating by different index provider on the 23 same company. And for Japanese corporate, you know, 24 they -- well, you can see that on our website, we actually 25 disclose a scatter map. And the correlation between the
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1 different -- the ESG rating agency on the change up in 2 these companies are very little, meaning the ESG rating 3 has not been converged yet. 4 And there are two possible explanations why. 5 One, the sophistication of rating agencies still not 6 there -- 7 INVESTMENT DIRECTOR SIMPSON: Yeah. 8 MR. MIZUNO: -- or data is not comprehensive. 9 INVESTMENT DIRECTOR SIMPSON: Both. 10 MR. MIZUNO: You know -- both. Probably both. 11 So we decided to promote and actually disclose 12 those -- the other, you know, discrepancy to promote the 13 more convergence. And over the last 3 years, we see much 14 more convergence in the E rating. So I think the asset 15 manager's view be on the environmental climate impact on 16 their portfolio has started merging. 17 S it seems impossible, because they -- we -- when 18 we ask them what kind of the topic they are actually 19 evaluating in the S area, you know, they actually evaluate 20 different things. It's actually more difficult to 21 converge. 22 G is -- also is not converging, because I think 23 the -- even if they have the same governance structure, 24 the effect of the governance is very different from one 25 company to another or one market to another market. So
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1 it's much more requires the other, you know, tailor made, 2 you know, approaches on the corporate governance. 3 So corporate governance is not only about the 4 formality, but also requires the other real reflection of 5 the corporate culture, and also the other sort of market 6 they are operating. But we think the corporate governance 7 is a very critical issue for Japanese company. That's 8 what the -- our manager tend to agree. 9 Okay. Thank you. 10 Any other questions? 11 CHAIRPERSON FECKNER: We do have a few others. 12 Mr. Perez. 13 COMMITTEE MEMBER PEREZ: Thank you, again. 14 This is probably more for Ben. Can we migrate to 15 something similar to them as far as the fee structure for 16 our managers? 17 (Laughter.) 18 CHIEF INVESTMENT OFFICER MENG: Not only if -- 19 can we, we have been. We have been benefiting from our 20 team, as you know, that -- even before I came, CalPERS has 21 been always driving the alignment fee interest with our 22 external managers and trying to cut down fees, improve 23 transparency. So we are very proud to say that we are one 24 of the global leaders together with GPIF and a few other 25 asset owners.
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1 But also, we need also the balance -- to balance. 2 Current, the market -- as Hiro will tell you, the market 3 is really hot. And Hiro already shared with you that the 4 GP community quote/unquote hate CalPERS, because of our 5 drive for lower fees, better align of interests, and 6 transparency. 7 And we keep on saying that, you know, we conduct 8 ourselves very professionally, respectfully, but with the 9 GP community, you know, we're also friendly, but not 10 really friends, because underlying we are still not on the 11 same side of the table. 12 So again, back to your question, not only can we, 13 we have been. And we have been very positive and we have 14 been a global leader in this field. 15 COMMITTEE MEMBER PEREZ: And I think, yes, we ask 16 for more transparency, but I think we're painted into a 17 box because of the law here. 18 Sir, there's been a lot of mention of fiduciary 19 duty, but we're painted in even a stricter sense in that. 20 We're in even in a smaller box than fiduciary duty, 21 according to the California Constitution. So how would 22 you -- I'll read you a brief sentence of what the law says 23 and then how would you reconcile that with the idea of 24 accepted fiduciary duty? 25 CHIEF INVESTMENT OFFICER MENG: So Hiro may or
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1 may not know the law you're referring to. I assume the 2 open meeting law? 3 COMMITTEE MEMBER PEREZ: No. 4 CHIEF INVESTMENT OFFICER MENG: No. Okay. You 5 may want to tell Hiro -- give Hiro a little bit of 6 background what law you're referring to, the context. 7 COMMITTEE MEMBER PEREZ: Yes, sir. 8 CHIEF INVESTMENT OFFICER MENG: Thank you. 9 COMMITTEE MEMBER PEREZ: It says the members of 10 the retirement board shall discharge their duties with 11 respect to the system solely, in the interest of, and for 12 the exclusive purposes of providing benefits to 13 participants and the beneficiary. 14 MR. MIZUNO: That's the same as we have the -- 15 what we have. The fiduciary duty is very interesting 16 concept. That started in the UK and spread globally. But 17 no constitution really has a very specific definition, 18 anything better than what's the -- you just described. 19 And then my interpretation is, basically, what 20 they are saying is we will work solely for the benefit of 21 our beneficiaries, right? And on the other hand -- if you 22 look it from different perspective, that fiduciary duty 23 concept started in the UK, because it used to be a lot of 24 political intervention into asset management. And also 25 there are a lot of the investment professional who try to
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1 make money for himself with ourselves at the expense of 2 beneficiary. That's why they came up with the concept of 3 fiduciary duty. Okay. 4 Now, we have more than enough transparency that 5 the -- our investment team has no way to benefit their 6 own -- you know, the purse, or their own -- you know, make 7 an investment for their own benefit. And also, I 8 understand CalPERS and GPIF operating under the most 9 stringent policy in terms of the sort of corporate entity, 10 et cetera. So basically, I have no concern that the other 11 investment team will get some personal benefit. 12 So the first one, political intervention over 13 some non-financial information get into the investment, 14 right? That's actually usually came through board, not 15 from the investment team, to be very honest with you, 16 because board is representing a lot of different 17 stakeholders. It's usually non-financial discussions 18 comes from our board, too. 19 Okay. Because investment team is very busy 20 trying to make money. And we believe -- you know, I 21 believe that all the ESG factor has become a relevant 22 factor for the investment. When I spoke on the Milken 23 Board -- Milken Institute conference, Henry Fernandez, CEO 24 of MSCI told me in 10 year's time there will be no 25 difference between ESG index and a market-weighted index,
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1 meaning -- because every single asset manager we hire 2 tells me they integrate ESG information into their 3 investment decision, meaning over the time, the market 4 will price that in. And so the other ESG index will 5 become the same as the market index. 6 But that thing I think is really necessary for us 7 to satisfy fiduciary duty, knowing those information will 8 be priced in over the next 10 years, we should take that 9 into account now. 10 So, sorry, if I sound like, you know, the -- 11 offensive to the Board. But I think the Board represent a 12 lot of different stakeholders and different interest. But 13 investment team usually only concerned about how to make 14 investment. So the older sort of the input, which I think 15 is against my fiduciary duty, usually come either through 16 or government or through our board. And I think it is the 17 whole reason why CalPERS, I think -- and GPIF is a 18 multi-stakeholder board. California case, their board is 19 all investment financial professional. So they are -- 20 they are technician or the expert board. So they actually 21 discuss investment like the investment team, you know, 22 discuss. 23 But our board, and CalPERS, I guess -- sorry, I'm 24 talking with very limited knowledge, but you are 25 representing all the stakeholders. So sometimes even if
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1 we think it makes sense financially, I don't mind our 2 board tells me it doesn't make sense from their -- you 3 know, their -- the stakeholder perspective. 4 But the investment team only focusing on 5 what's -- how to make the best investment. And I feel 6 very upset when our board -- our regulator tells me when I 7 talk about ESG, I actually did not, you know, bring in 8 some non-financial information into my job. No. I'm okay 9 actually using it, because we think it's irrelevant 10 financially. So I actually see no conflict between the 11 other -- you know, how to satisfy fiduciary duty and how 12 to take these into analysis. 13 And thank you for the talking about the fee 14 structure. I mean, that's actually -- you know, no asset 15 owner pays enough attention to. Although, I think, it was 16 against our fiduciary duty to keep paying the fixed fee 17 knowing their active manager never performed as they 18 promised, right? 19 So I think the -- I actually, you know, asked the 20 CalPERS Board -- and I actually, you know, hope that our 21 Board is listening to the presentation. You know, you 22 have to be a little bit creative and flexible, because I 23 think conventional wisdom of the other portfolio 24 management is no longer perfect. And we need to think 25 about other things.
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1 And you are representing younger generation 2 started working at the police office. And they really 3 care about the global environment. Of course, they 4 should. And I'll be very embarrassed -- you know, two 5 days ago, we released our new ESG activity report, where 6 we disclosed our current portfolio aligned with like a 3d 7 plus, so it's not meeting Paris Agreement. 8 And an easier solution for us is if we divest 9 some of the other, you know, the fossil fuel industry, we 10 can improve the portfolio analysis. But, you know, I 11 think as a universal owner, we only should be satisfied -- 12 we should sleep well when the whole market becomes 13 sustainable. Because it doesn't make any sense. Even if 14 we sell some shares, somebody own the share at the lower 15 valuation. So they actually make financial benefit as 16 well as the -- they will continue to affect whole our 17 system. 18 So, sorry, it takes too long for me to address 19 your question, but this is very, very center of our work. 20 You need to have a clear understanding what the fiduciary 21 duty means. And it should be creative, because now we 22 need to take a lot of more information into that 23 discussion. 24 COMMITTEE MEMBER PEREZ: As you said, I'm a 25 police officer, so I read the law, and that's the way I
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1 interpret it. And the way I interpret this specifically 2 when it says, "for the exclusive purposes of providing 3 benefits". It's not their well-being. It's not anything 4 else. It's just -- so, to me, that means making money for 5 the benefits. 6 MR. MIZUNO: Yeah. But we need to make money for 7 long term. That's the point. It's very easy to make 8 short-term performance, if we don't care about those kind 9 of things. But if we're talking about like a 30 year's 10 time, you know, 30 year's time, the people who are born 11 here, born today will start working as a police officer. 12 And we cannot leave a society which is not, you know, 13 feasible for those generations. 14 And I'm not philanthropist. I'm not the 15 environmental activist. But, you know, I actually show 16 that the GPIF was featured in Harvard Business School case 17 study. And I was surprised when I was invited to speak to 18 these students, 400 students attended the classes. They 19 want to discuss how we should make the capital market more 20 sustainable and more inclusive. 21 You know, there are -- those 25 year's old 22 Harvard Business School students think, they don't want -- 23 they don't think the other -- the conventional capital 24 market or like, you know, the capitalism will not -- will 25 survive. So I think if you are running the business, you
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1 have to concern about how to recruit from those kind of 2 students body. And everybody is asking questions, like, 3 whether working for this business is going to contribute 4 to make the society better or actually damaging the 5 society. 6 You know, I definitely recommend everybody to 7 talk to younger generation. My daughter just graduated 8 from UK college and finally found a job. But she always 9 asked the question in the interview how can I contribute 10 to the world by working -- you know, working here? 11 That's the question I never thought of when we 12 were young. And, you know, the employer has to address 13 that now. And the reason why we call it this kind of 14 thing holistic approach is it's very difficult to prove 15 our ESG initiative is adding value to our portfolio over 16 the next month or so. Maybe over the next 3 years is 17 going to be difficult. But I believe in 30 year's time, 18 these kind of thing will make a huge impact. 19 And, you know, GPIF, CalPERS, what -- regardless 20 of what we do with our portfolio, we are going to -- we 21 are going to have exposure to the general economy. And if 22 the general economy failed to be sustainable, we will fail 23 to be sustainable. 24 So I actually think that's going to address your 25 question. You know, the -- by incorporating ESG, we are
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1 going to secure the future benefit. And how long is it 2 going to take to materialize? Probably 10 years as the 3 MSCI CEO tell us. But I won't be surprised if it actually 4 started materially in 5 year's time. 5 CHIEF INVESTMENT OFFICER MENG: Yeah. And if I 6 may add, additional challenge we face at CalPERS than GPIF 7 in terms of being a long-term investor, as Hiro just 8 mentioned that at least in the next 25 years, there are no 9 forecasted payout. But we pay out more than $20 billion a 10 year. So why to ensure that we can survive the 11 short-term, so that we can thrive in the long term. So 12 that's an additional challenge we have to face. 13 And the other one is again, as you mentioned, 14 that the plan is for the fund to run down in 100 years. 15 So the period, you're tl sell off the asset to pay the 16 benefit, then you're done. You've served the mission -- 17 the historical mission. 18 But CalPERS is perpetual. We don't have a 19 timeline or plan to sell down asset and terminate the 20 program. So there's another additional layer of challenge 21 that we have to face at CalPERS. 22 COMMITTEE MEMBER PEREZ: And I think another -- 23 another aspect is that we're hovering at 70 percent 24 funded. 25 CHIEF INVESTMENT OFFICER MENG: Correct.
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1 INVESTMENT DIRECTOR SIMPSON: Right. 2 COMMITTEE MEMBER PEREZ: So I mean, I'd have a 3 little less heartburn, if we were over 100 percent. But 4 since we're struggling to -- not struggling. Since we're 5 trying to get that -- hit that discount rate and raise our 6 funded status, I think we need to make money today. 7 CHIEF INVESTMENT OFFICER MENG: So there will be 8 a balancing act. So it's a little bit different that 9 GPIF. 10 MR. MIZUNO: They're our chief boss, of course. 11 I mean, if we don't deliver the performance, we should be 12 out of our job anyway, right? 13 So that's what I always struggle. Like, you 14 know, taking these into investment decision making, I 15 think it makes 100 percent of the investment financial 16 sense. But even the people who are argue, it doesn't, 17 we'll have to achieve both. Like, what we -- that's 18 exactly what we demand from corporate executive, right? 19 We expect the corporate executive to deliver a lot of 20 different things. And we should be -- we should be 21 required or, you know, we should be expected to deliver a 22 lot of things together. 23 So that's why we spend 1 year designing those ESG 24 indices to perform in line with the other -- you know, the 25 original benchmark, still achieving better ESG
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1 performance. So that's where those like prudent expertise 2 should kick in. You know, we are financial expert. We 3 know how to design index. And we spend hours and hours to 4 design ESG index to satisfy the goal you mentioned. So 5 all our index is designed very carefully not to 6 underperform. Of course, sometimes up underperform, but 7 still that achieve the other goals at the same time. 8 So unfortunately, we are living in the world. 9 You know, there are several like surveys the Baby Boomer 10 they think during the other working, they only focus on 11 making money. And after retirement, they should make some 12 donation. 13 But the younger generation think they should do 14 them both at the same time. And that's not only 15 generation, but I think the world is changing. And that's 16 exactly what we expect from our portfolio -- you know, 17 portfolio company executives, and we should try to deliver 18 the same. 19 So if me or, you know, Ben don't deliver the 20 other -- the financial performance, I have no question we 21 should be fired, but -- 22 COMMITTEE MEMBER PEREZ: I'm proud of the work 23 the investment team has done. I want to make that clear. 24 And Beth does a fantastic job in this area also. The only 25 glaring example that comes to mind is our divestment from
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1 tobacco. 2 MR. MIZUNO: We actually don't divest from 3 tobacco. I mean, I don't want to create the controversy 4 here, but -- 5 (Laughter.) 6 CHAIRPERSON FECKNER: Too late. 7 COMMITTEE MEMBER PEREZ: It's supposed to be 8 education and dialogue, right? 9 (Laughter.) 10 MR. MIZUNO: Okay. Well -- Okay. I tell you. 11 GPIF's ESG index is only one index in the world which 12 include the tobacco industry, because generally speaking, 13 ESG investor don't like tobacco. So the older existing 14 already available ESG indices exclude tobacco as the first 15 negative screening. 16 And GPIF made it clear at the beginning of our, 17 you know, selection of ESG indices that we don't accept 18 any industry-by-industry divestment. So we demanded MSCI 19 to actually score Japan tobacco using same the ESG, like, 20 you know, their scoring model. And we told them if they 21 turn out to be very high ESG score company, we include it. 22 And as a matter of fact, it was included. 23 So we are very popular with the Japan tobacco and 24 tobacco industry, so -- but again, I think it's the -- 25 also, the Board decision, because as I said, Board is
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1 making decision not only financially, because that's the 2 reason why the Board has the multi-stakeholders. So if 3 you decided to -- you know, if the GPIF board decided we 4 should divest from tobacco, I would divest. 5 But simply, we are -- when we ask to make a 6 financial decision, we keep it. And also, I feel 7 uncomfortable, because I don't know about California, but 8 in Japan JTI is owned by Japanese government. So I just 9 thought it's a little bit of self-contradictory. Like, 10 you know, the government pension fund divest from the 11 company who owns by Japanese government. So this another 12 sensitively. 13 But I think this should be the clear distinction. 14 Like, investment team make a financial decision, but 15 sometimes board make non-financial decision. And if you 16 ask us to make a financial decision, tobacco, you know, 17 performed very well. But, you know, I have no objection, 18 if our board tells me to divest from tobacco for the 19 different purposes or different reasons. 20 You know, that's a difference between the board 21 which representing the -- you know, the other multiple 22 interests -- stakeholder interest or general interest. 23 Our job is just to make the good investment, so... 24 COMMITTEE MEMBER PEREZ: Thank you. 25 CHAIRPERSON FECKNER: Ms. Olivares.
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1 COMMITTEE MEMBER OLIVARES: Thank you. This is 2 fascinating to me. I'd like to go back to page 20 of your 3 deck and take a look at the alpha, particularly under your 4 MSCI Japan Empowering Women Index -- 5 MR. MIZUNO: Yeah. 6 COMMITTEE MEMBER OLIVARES: -- 0.65 percent, 7 right? Can you explain to me what that index holds? I 8 don't want to get into individual investments too much, 9 but I find that alpha intriguing. 10 MR. MIZUNO: Well, I'm very happy to see like, 11 you know, this women empowerment index overperformed, 12 because I was most concerned about this index, which 13 may -- you know, is likely to underperform. And it was 14 actually recommended by some of our team member like, you 15 know, it's safer -- reputationally safer for us to go for 16 the general ESG indices, because it's not very clear where 17 we underperform or, you know, they overperform. 18 But when we selected the -- this women 19 empowerment index, everybody knows that we are kind of 20 betting on gender diversity's effect on the other stock 21 performance, right? 22 And there are several academic researches that 23 the company a has better -- you know, gender diversity 24 seems to overperform. But to be honest, I'm not sure, 25 because it may be like, you know, the company who has the
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1 more gender diversity meaning, that company's culture 2 itself is better, right? So it's kind of like which is 3 cause and which is result, which is not very clear. 4 So we actually made a strategic judgment. You 5 know, when people talk about Japanese corporations, there 6 are two obvious weaknesses the global investor always 7 criticize about what. One is corporate governance, which 8 Henry mentioned. The second is gender diversity of women 9 participating in the workplace. 10 So that's why we decided to address it. By GPIF, 11 the biggest owner of Japanese equity market, shows our 12 belief in gender diversity. We'll promote the more gender 13 diversity across Japanese industry. And that's again 14 the -- our concept is we will contribute to make the -- 15 our economy more sustainable. 16 So if you think that gender diversity contribute 17 to the sustainability of the business, I think CalPERS 18 should invest into these indices. And our index is open 19 for everybody, so I welcome CalPERS to join. 20 But I think, you know, the -- for the U.S., you 21 already have the much better gender diversity. But in 22 Japan, we are catching up. So probably, while we are 23 catching up, we probably easier to make the other -- the 24 shorter improvement. And you may if -- even if you may 25 create the same index using the U.S. companies, you may
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1 struggle to overperform. 2 But again, you know, it's not about 3 overperform -- overperformance, these ESG index trying to 4 send a signal throughout the system. You know, the active 5 managers, as I mentioned -- because from the company's 6 perspective, this guy may sell my stock tomorrow, right, 7 but the index, they know -- they invest -- they will 8 continue to hold the stock for ages, right? So that's why 9 it has much stronger impact on the whole industry. 10 So it is a strategic decision. I'm very glad I 11 saw the overperformance, because I was concerned about if 12 it didn't, I mean, it would actually send a negative 13 signal to the market that gender diversity does not 14 contribute to the corporate performance. So I'm really 15 glad at the moment. 16 And when I presented to -- this to Japanese 17 Business Roundtable at their Gender Diversity Committee, 18 they ask me whether I think this index will overperform or 19 not? And I responded saying if you -- women work well, it 20 should over perform. Because we only believe -- we -- all 21 we can do is we believe in the company has the better 22 gender diversity will have a robust performance, but it's 23 not us to prove it. It's them to prove. 24 So please ask the other -- your investment to 25 join us to support those kind of gender diversity index,
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1 because this is not where the biggest gender diversity 2 index in the world. 3 COMMITTEE MEMBER OLIVARES: Thank you. 4 CHAIRPERSON FECKNER: Thank you. 5 Ms. Middleton. 6 COMMITTEE MEMBER MIDDLETON: Okay. I think some 7 of what I was going to ask has already been asked. But to 8 put it in very simple terms, it seems to me the case you 9 are making is that ESG contributes to the long-term 10 stability and sustainability of our markets, and that all 11 of us have a vital vested interest in achieving that. 12 MR. MIZUNO: Um-hmm. 13 COMMITTEE MEMBER MIDDLETON: And I think that is 14 in part the answer to the question of should we be making 15 short-term decisions that may have greater profitability 16 for -- in the very short-term. 17 MR. MIZUNO: Thank you. That's the sort of 18 fundamental and the question we have to address. And 19 again, you know, I always tell my team, like, we need to 20 achieve both, right? Because that's exactly what we 21 expect from the corporate executives. You know, they 22 never ask investors do you want the short-term performance 23 or do you want the long-term performance. They never ask, 24 because investor demand them to deliver both, right. 25 And I don't -- I think I would say why we are
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1 different. So the other -- we have to deliver both. But 2 there are certain cases we find is a bit conflicting, 3 short-term return and long-term sustainable performance. 4 And I think it should be reflected in your investment 5 belief and the other characteristics of your fund. GPIF 6 is that we are literally a universal owner and 7 cross-generational investors. I think when we face that 8 kind of conflict, we should prioritize longer term 9 sustainable performance. 10 But, you know, again, coming back to fiduciary 11 duty debate, I always find it's very strange, because when 12 you dis -- you know, people discuss this is against or 13 for -- pro fiduciary duty, they don't talk about the -- 14 what kind of the customer they are serving, right? 15 Because if my customer ask me to give them -- 16 give their money back next month, of course, I don't take 17 the ESG into my account, my investment. It totally 18 irrelevant, right? 19 But if we are talking about 20, 30 years, I'm 20 convinced all those ESG issues are relevant, the factors. 21 And the other thing I want to mention is like, I'm on the 22 board of PRI, where they are -- they try to, you know, 23 make advocacy of the ESG. And there's some difference in 24 the opinion. Some people think ESG should be a source of 25 return. The other people think ESGs are potential risks.
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1 And my observation is it's almost unanimously 2 agreed within the investment community, ESGs are 3 contingent risks to portfolio. So if you have a trouble 4 to justify or convince yourself that ESG is a contributor 5 to performance, just use that as risk factors. Because if 6 you reduce the risk factors, your risk-adjusted return 7 will improve anyway, right? 8 So I think the other -- you have to decide. As 9 far as GPIF is concerned, so far, we have been using ESG 10 as risks rather than opportunity. We use SDGs when we are 11 trying to convey some future opportunities for the -- when 12 we talk with the business -- you know, the business 13 executives. But ESG we basically use as a risk, rather 14 than opportunities. 15 But even if it's risks, it will improve the 16 performance, because risk-adjusted return is actually the 17 real return you should get from the investment. 18 Did I answer your question? 19 COMMITTEE MEMBER MIDDLETON: Very well. Thank 20 you. 21 CHAIRPERSON FECKNER: Thank you. 22 Mr. Miller. 23 COMMITTEE MEMBER MILLER: Thank you. One of the 24 things that kind of struck me and it's very refreshing is 25 this idea of challenging the conventional wisdom that is
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1 widely held not just by the public, but especially by the 2 financial services industry, and people in this business. 3 And it kind of struck me, yesterday, we were talking a 4 little bit about the new normal when it comes to thinking 5 about buydowns and recessions that the conventional wisdom 6 of 30 years ago just doesn't seem to apply. 7 And the conventional wisdom of, you know, modern 8 investment management theory from 80 years ago, ideas 9 about market knowledge, and valuation, and efficient 10 frontiers, and all this and that, a lot of it doesn't seem 11 to work anymore. 12 And when you would talk about the fees, this 13 concept of, you know, pay and performance seems to leave 14 out kind of the concept of Deming's Bed Beads experiment, 15 that you've got this big circle of luck or chance, and 16 this smaller circle of skill or competence, the minimum -- 17 and this little intersection that you're trying to reward, 18 and we so often end up rewarding or punishing chance and 19 basically wasting our money. That whole active/passive 20 thing. 21 So my question to you is are there other areas 22 kind of the conventional wisdom, which often seems to 23 really serve the interests of the financial services 24 industry more than us that you see there's a new normal? 25 That the conventional wisdom just doesn't really work
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1 anymore and we need to kind of break out of those kind of 2 mental models or mindsets? 3 MR. MIZUNO: That's a -- that's a tough question, 4 because -- to answer, because it's a really good question? 5 (Laughter.) 6 MR. MIZUNO: For example, the benchmarking -- the 7 concept of benchmarking is created because customer didn't 8 want to pay for luck, right? And also, the asset managers 9 don't want to be penalized for -- possible for something 10 out of their control. And the Board's priorities is like 11 a needs much and it created the conventional system of 12 active managers evaluated relative to benchmark. 13 But if you are running a business as a corporate 14 executive, you cannot tell your shareholders like, you 15 know, we lost money, because the market shrunk last year. 16 It's not my fault. They wouldn't accept it, right? 17 So in real life, the people are evaluated both 18 for their skills as well as lucks. And, you know, our -- 19 recently, our core research program with the Sony Computer 20 Science Laboratory, AI came up with what they called 21 distiller to actually judge when the performance delivered 22 by active manager, whether it was their intentional 23 success or luck. And we came to realize some people has 24 been consistently lucky. 25 (Laughter.)
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1 MR. MIZUNO: But, you know, it may change our 2 perception. Because, you know, we used to think we need 3 to segregate the luck from the skill. And we only should 4 back the manager who has skills. But if we realize, some 5 person has been consistently lucky and being able to 6 deliver the performance to us, we maybe should pick that 7 one, right? 8 So there's a lot of, you know, new perspective we 9 are bringing to our business. So even for the area of the 10 asset management of the way we analyze their performance, 11 I think the conventional wisdom probably being destroyed 12 or being challenged. 13 But more broadly to answer your question, I think 14 we are facing the situation like nobody knows when this 15 mandatory easing contract, you know, the close -- 16 finishes. You probably don't remember, but it was 17 Japan -- Bank of Japan who started -- who did the first 18 quantitative easing in history of mankind. And most of 19 U.S. prominent economists criticized the Bank of Japan 20 saying they are some -- doing something really stupid. 21 But when a demand crisis hit the market, 22 everybody actually copied what the Bank of Japan did. And 23 so, you know, that was totally unconventional 20 years 24 ago. Japan had the guts to experiment it, and now 25 everybody copied. The problem is nobody has the guts to
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1 experiment -- experiment how to get out of it. 2 And I was hopeful Fed will do it, but now is 3 going into different direction. So we are now operating 4 in a very, very sort of uncharted like environment, where 5 every single major -- you know, the central banks printed 6 tons of money over the last 10 years and nobody knows how 7 to close that. 8 And I've been very surprised the market has 9 been -- not now, but if you remember one year ago, 10 everybody thought the Fed will be able to maneuver or 11 navigate the other -- how to exit from quantitative easing 12 well. I was skeptical, because nobody tried it. First 13 trial is going to be bumpy all the time. 14 So I really cannot specifically answer your 15 question. But there's a lot of things which never 16 happened in the past, and when we do it for the first 17 time, it's going to be very bumpy. Yeah. 18 COMMITTEE MEMBER MILLER: Thank you. 19 CHIEF INVESTMENT OFFICER MENG: Yeah. That's 20 something mentioned a couple times your colleagues about 21 as well, the new normal. So what is the new normal? But 22 definitely this is the conventional wisdom doesn't work in 23 today's environment anymore. 24 As a recent example, a few weeks ago, PIMCO put 25 out a paper they called the negative nominal interest rate
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1 will become the new normal. And that's what we talk about 2 yesterday, I highlighted. That's one of the scenarios we 3 stress test our portfolio, what if that became reality? 4 Are we ready for that? And also I talk about how would 5 capitalism work when capital is free or when capital is -- 6 carry a negative interest rate? 7 So that is uncharted territory. And if you 8 extend that line of argument, one of the scenarios could 9 be when people say, what's the future of Europe? Look at 10 Japan. What's the future of Europe? What's the future of 11 us? Look at Europe. That's the future of us, right? 12 So in Europe now, again, the 30-year German bond 13 nominal yield is negative already. And Japan's like the 14 deflation and then disinflation. And Europe and we are in 15 kind of a disinflation environment. So that can be one of 16 the potential scenarios in the future. 17 So back to your question you mentioned the new 18 normal, the convectional wisdom does -- may not work in 19 today's market environment. So we all have to very 20 mindful and keep on -- keep thinking outside the box, 21 instead of limit ourself to the conventional wisdom. And 22 that's why dialogue like this is very helpful. 23 COMMITTEE MEMBER MILLER: Thank you. 24 CHAIRPERSON FECKNER: Thank you. 25 Ms. Yee.
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1 COMMITTEE MEMBER YEE: Thank you, Mr. Chairman. 2 A couple thoughts. One, I need to just add my 3 thanks to you, Hiro, for your leadership, particularly 4 through your participation and involvement in Climate 5 Action 100+, which really I think just brought about the 6 entire Asian community -- the continent of Asia to the 7 table, which is so key, in terms of where we need to move. 8 And perhaps this is a bit of synergy, but I'd 9 like to think without as much skepticism as I currently 10 have, but our own business roundtable just yesterday has 11 also kind of declared a different way of thinking about 12 how to bring about value, and, you know, made declarations 13 that generating shareholder value is not going to be their 14 main objective and understanding now. 15 And I believe a lot of this is because of the 16 engagement that we've had with them globally and 17 understanding that the world is changing around them. But 18 that value really needs to be about how they value their 19 employees, their suppliers, the communities in which they 20 have a presence. And, you know, I think all of this is 21 just really additive in terms of how we're going to look 22 at all these issues in the long term, but I think it's 23 additive with respect to how we're going to sustain our 24 markets going forward as well. 25 So I just wanted to make that statement, because
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1 obviously this is top of mind for just -- not just the 2 pension funds, but just in terms of how we just kind of do 3 business in this, you know, kind of commonplace now around 4 the world. I think there's a lot of thought that's 5 evolving, which seems to me at least going in the right 6 direction, similar direction. 7 MR. MIZUNO: Thank you. I think the -- 8 yesterday's like the Business Roundtable like Jamie 9 Dimon's like statement about the shareholder's values no 10 longer the primary purpose of the business, which we 11 should argue that he should have said like the shareholder 12 value is not only primary goal of the corporate 13 businesses, right? 14 I mean, this is again -- like, it's not going to 15 be ESG or financial return argument. They should achieve 16 both. So I think the other -- as we are steward of our 17 beneficiaries. We need to make it clear they cannot use 18 it as excuse not to deliver shareholder value, but -- 19 which I think is important. 20 But I think that's another evidence, you know, 21 the people like him started thinking differently. And now 22 they feel the pressure that they need -- it need to serve 23 the other stakeholder to remain a business. 24 And one other things we -- that he -- they talked 25 about was like the pay gap -- gender pay gap or the income
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1 inequality. That's the S issue. But it's going to create 2 a lot of social issues. And, you know, we are not safe -- 3 or we are not distant from what's happening in society. 4 You know, the other -- what your democracy of 5 United States brought up to the world actually affecting a 6 lot of our investment, right? So the political decision 7 affect the performance of our portfolio as well. 8 So I think that conventionally industry -- 9 investment professional you spend the day looking into 10 Bloomberg chart. Now, I think we should pay more 11 attention to what's happening in the world from the broad 12 perspective, and what happening to the society, how angry 13 the young people and several, like some working classes is 14 going to affect our portfolio. It's only affecting. 15 I was involved in a G20 meeting, and, you know, 16 the -- some of the sustainability agenda was vetoed by 17 American -- U.S. federal government. And so there's no 18 discussion on those topics. And that's actually the 19 consequence of the other -- your democratic choices. 20 So, sorry, I have no personal opinion on that. 21 But, you know, I'm just trying to convey, you know, the 22 time the investment professional use to spend the whole 23 day watching the Bloomberg TV screen has ended. 24 CHAIRPERSON FECKNER: Thank you. 25 No other requests to speak.
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1 Anything else, Mr. Meng? 2 CHIEF INVESTMENT OFFICER MENG: I think just in 3 conclusion, I really want to thank Hiro for this 4 thought-provoking talk with the dialogue with you. And I 5 want to thank him for making this special effort to come 6 to us. He flew in from Tokyo last night just to give 7 us -- to talk to us. And then he will be on his way to 8 London to seek his daughter. So he's really making this a 9 very special trip for us. So thank you. 10 CHAIRPERSON FECKNER: We're very honored to have 11 you be here. Thank you. 12 (Applause.) 13 MR. MIZUNO: Well, just to give you my last word, 14 thanks again for inviting me. It's my honor to present, 15 you know, the GPIF initiative and also my own thought to 16 the CalPERS Board. 17 And as I put in my final slide, I think asset 18 owner should work together to achieve a lot of things. 19 And even just the fee for the asset managers, we can work 20 together and to make our business more sustainable and 21 more aligned for the benefit of fiduciary. 22 And thank you very much. We always regard 23 CalPERS our closest -- the sister or like the partner. So 24 thank you very much for inviting me today. Thank you. 25 CHIEF INVESTMENT OFFICER MENG: Thank you.
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1 CHAIRPERSON FECKNER: Well, it's been our 2 pleasure and honor to have you here, so thank you. 3 (Applause.). 4 CHAIRPERSON FECKNER: With that, we're going to 5 take a 10-minute break -- make it 11. We'll reconvene at 6 10:45. 7 (Off record: 10:34 a.m.) 8 (Thereupon a recess was taken.) 9 (On record: 10:45 a.m.) 10 CHAIRPERSON FECKNER: Can we please take our 11 seats. We'd like to begin again. We still have quite a 12 bit on our agenda. 13 Mr. Meng. 14 Not yet. Not yet. 15 There you go. 16 CHIEF INVESTMENT OFFICER MENG: Thank you, Mr. 17 Chair. So now we continue the second half of the Board 18 education program this morning. This is on global 19 equities. With that, I will turn it over to Dan 20 Bienvenue, the Managing Investment Director of Global 21 Equity to introduce our distinguished guest. 22 INTERIM CHIEF OPERATING INVESTMENT OFFICER 23 BIENVENUE: Thanks, Ben. Dan Bienvenue, MID of Global 24 Equity. 25 This morning, we're moving on to our second asset
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1 class overview. If you recall, this is part of your 2 series -- you know, the educational series as part of the 3 Board workstreams. This is the second asset class we're 4 covering. We covered fixed income in June, after covering 5 in May, I believe it was, asset classes, risk and return. 6 This recall is work in partnership with the CFA Institute 7 and the Council of Institutional Investors to build this 8 curriculum over the past couple and the next several 9 months. 10 Today, it's my pleasure to introduce John 11 Griswold who is part of the CFA Institute senior faculty, 12 and has extensive experience teaching investment programs 13 to pension fund boards around the country. So he has the 14 unenviable task of following Hiro. But believe me that 15 John is here to really walk us through global equity and 16 take a deep dive. And we are really fortunate to have him 17 here as well. 18 (Thereupon an overhead presentation was 19 Presented as follows.) 20 INTERIM CHIEF OPERATING INVESTMENT OFFICER 21 BIENVENUE: You have his full bio alongside with his 22 slides, so I won't repeat what have you there. But 23 needless to say, John is a highly respected leader in the 24 field of Board education on investments. We're very 25 grateful for him making the time also to come out and
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1 spend time with us and dig into the global equity asset 2 class. 3 Once again, we're hoping for a good lively 4 discussion. We think that, you know, it works better when 5 it's done that way. So John and I also will be looking 6 forward to questions and comments as we go through. 7 And with that, I'll turn it over to Anne to kick 8 us off. 9 INVESTMENT DIRECTOR SIMPSON: Thank you very 10 much, Dan, and Ben, and, of course, John for being here 11 with us. My job is quite simple. It's just to recap 12 where we are in this series of board education. 13 Your recall when the Board went through its 14 self-evaluation last year, improving education for each of 15 the committees was one of the findings. And as Dan said, 16 we are delighted to be working in partnership with the CFA 17 Institute and with the Council of Institutional Investors. 18 And we're working our way through the key topics 19 in investment. And following Hiro, I think has given us a 20 case study, an example from a sister fund looking at these 21 issues from a global point of view, we'll be looking at 22 specific asset classes this morning. 23 The other thing I want to just recap is what is 24 the role of the Investment Committee? It's a Committee of 25 the Board in relation to investments. This is the day job
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1 of management. It's the role of consultants. But the 2 Board has a very particular responsibility. 3 As Dan said, this is workshop number 3, part 2. 4 We've covered risk and return basics. We then covered 5 global fixed income. And today, we're going to be looking 6 at global equity. 7 --o0o-- 8 INVESTMENT DIRECTOR SIMPSON: So this is our 9 favorite slide to show, whenever we're talking about 10 investment. It's the one thing that keeps us all 11 absolutely focused on the job of generating sustainable 12 returns for the pension fund. We pay pensions in dollars. 13 And this is the CalPERS Pension Buck. And it reminds us 14 that for every dollar for the, as Ben said, more than $20 15 billion that are paid out every year, $0.59 come from 16 investments. 17 So getting it as right as we can, getting as much 18 luck on our side as well as skill is going to be vitally 19 important. And the role of the Board in that is critical. 20 And that's really what this education program is intended 21 to do, help you fulfill your responsibilities more 22 effectively. 23 --o0o-- 24 INVESTMENT DIRECTOR SIMPSON: And so what are 25 those? So in the formalities of the CalPERS system, of
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1 course, the Board divides up the job of overseeing the 2 organization through a series of committees. And the way 3 these responsibilities are set out is through what's 4 called a delegation. 5 And for the Investment Committee, there are 6 important responsibilities. Conducting strategic asset 7 allocation. As Hiro said earlier, this is where the vast 8 majority of returns come from getting those decisions 9 right. And the Board also has responsibility for 10 selecting and overseeing performance of the Board 11 consultants. 12 So what is the Investment Committee charged with 13 overseeing? This is really the monitoring function that 14 the Investment Committee has. Of course, investment 15 performance, that goes without saying. But also a 16 component of this is find liquidity; the selection and 17 performance of partners, managers, and consultants; cost 18 effectiveness; risk assessment; Environmental, Social, and 19 Governance Program; and the management of risks. 20 So the critical word here is oversee. This is 21 actually work that's done by management. And the role of 22 the Board is to oversee and hold accountable. 23 So with that in mind, just as background, let me 24 now turn over to John who's going to take you through how 25 to think about global equity and the role that it plays in
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1 our portfolio. 2 So, John. Thank you. 3 --o0o-- 4 MR. GRISWOLD: Thank you, Anne. And thank you 5 for allowing me to come and talk with you this morning. 6 As Dan said, I've been doing work in helping investors do 7 a better job for their institutions for a very long time. 8 I've worked for -- I've been a trustee of many boards 9 going back longer than I would care to admit, and on many 10 of investment committees, when I came early -- early on 11 fascinated with how the process of governance and of also 12 managing funds affected the sustainability of the 13 organizations and really increased their ability to 14 achieve their missions. 15 I've worked in the nonprofit arena for most of my 16 career of investing. I worked for 25 years plus at 17 Commonfund, which was started by the Ford Foundation in 18 1971 as a nonprofit investment management company for 19 endowments in the education field, mostly higher ed 20 independent schools. We did a lot of research over the 21 years. We wrote a lot of white papers and even some 22 books, and did a lot of investor education. 23 Along the way, of course, meeting a lot of folks 24 who were leaders in the industry, nonprofit industry, 25 including pension funds, has been a real education for me.
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1 That continues. A lot of my friends who have been friends 2 for many, many years are still engaged in this work and 3 there is sort of a calling to it. It is hard to follow -- 4 follow a guy like Hiro, because, in fact, he embodies so 5 much of what is being done today to continue the mission 6 of these organizations that are vital to the future of 7 their beneficiaries, whether they be the student health 8 care patient, a pensioner, or any other charitable 9 recipient of any service or financial benefit. 10 So it's a remarkable industry, if you will. 11 There's some wonderful statistics the Urban Institute puts 12 out that non-profits actually contribute a bit over 10 13 percent of the wages and salaries in this country, 14 accommodate -- it's responsible for over 5 percent of GDP. 15 The assets are 3 plus trillion dollars at last count, 16 probably a bit more than that. But Americans give well 17 over -- almost -- I think over $400 billion to charities 18 every year. So it's a very large industry. It's a very 19 large -- it's a large activity providing the safety net in 20 this country. 21 So clearly, congratulations to you for the time 22 you spend, the dedication you show to helping CalPERS do 23 its part in benefiting its pension -- pension recipients, 24 its beneficiaries. 25 Let me start with a few things -- by the way, I'd
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1 like, with Dan and Ben's permission, to ask that you ask 2 questions along the way. I started as a teacher actually 3 in Connecticut right out of college. And I always -- I 4 learned very early that I wanted to know what the -- what 5 my audience was thinking. And the only way you do that is 6 to get them to ask questions. So please ask questions. 7 We can try to answer them. I've got some extraordinary 8 depth of knowledge here about CalPERS. I'll try to add a 9 little overview as Dan and Ben know on the principles 10 involved in global equity. 11 Global equity, of course, is the largest single 12 asset allocation within your policy portfolio. 13 --o0o-- 14 MR. GRISWOLD: And we might as well go back to 15 real basics and ask what is equity? Equity is actually a 16 piece of the corporate financial structure in companies. 17 It is -- they are -- it is common stock or different kinds 18 of stock. It could be preferred. It could be warrants. 19 It could be depository receipts for those foreign 20 investors. 21 But it is really issued to raise capital for the 22 operation of the company, so that they can grow their 23 business, expand their share. 24 --o0o-- 25 MR. GRISWOLD: There is -- as I say, there are
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1 many types of shares, but they do allow the holder to 2 vote, unlike the holders of debt. Some of you may 3 remember my colleague from CFA Institute, Jeff Bailey who 4 was here I think a month ago approximately talking about 5 fixed income. And we'll make some comparisons between 6 equity and fixed again to remind you of that. 7 But, in fact, common stock is one the lowest in 8 the ranking of the capital structure, but it's a very 9 important piece, because it raises the most money, in most 10 cases. Issuing stock is obviously ownership in the 11 company. You are participating in the growth of the 12 company, unlike fixed income holders, and you're, by 13 extension participating in the growth of the economy. As 14 the company grows, it's part of a growing economy. 15 And that's true globally. That's why there is 16 an -- there is an allocation to global equity in most 17 large institutional funds, because they wish to 18 participate in the growth of the global economy. And that 19 has happened over many, many years. There will be some 20 other slides where I'll talk a little bit more about that. 21 One of the things that, of course, you get to do 22 as a common stockholder, other stockholders to some 23 extent, is to participate in the voting about corporate 24 issues, corporate concerns. 25 And that's when it comes to ESG or any other
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1 issues, compensation - you can think of a lot of them - 2 there are tremendous opportunities for shareholders to 3 influence that. And in this country, of course, we've 4 seen a continual concern. When I work with the CFA 5 institute, which I think most of you are familiar with. 6 If your're not, please ask a question about it. 7 But I am not a CFA charter holder myself. I'm a 8 member of a committee, which is called the U.S. Advocacy 9 Advisory Committee, USAAC. And it's one of several 10 committees around the world that the CFA Institute has 11 developed and has put in place to pick up issues from the 12 local countries/regions and bubble them up to the senior 13 staff and to other important people working with CFA 14 Institute to do advocacy to the regulatory authorities, 15 SEC, FINRA, et cetera, Labor Department, and to promote 16 best practice, and ethical behaviors, and good behaviors 17 basically for the investment industry and for generally 18 asset owners as well. 19 So a lot of the work we do -- we have meetings 20 and discussions during the year. We meet once a year for 21 sort of a plenary retreat meeting in Washington. And a 22 lot of the members, most of them are CFAs, except for me. 23 I do feel honored to be a part of that. But in fact, 24 those society -- local society members bring their issues 25 to the table at those retreat meetings. And then the
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1 senior staff and other important advocates for changing 2 some of the regulations, some of the laws, some of the 3 practices do their work on the Hill or with the SEC. We 4 have the SEC come in and talk to us about what they're 5 doing. 6 And, in fact, I think it's an opportunity for -- 7 as Hiro said in the earlier session, there is an 8 opportunity to be heard. And particularly if you're a 9 large asset owner, of course, there is, because people 10 tend to listen to those. But even as a local CFA person 11 who is working in a local advisory form, or a bank, any 12 number of different types of jobs, they could be heard 13 through the work of the Advocacy Committee. Very 14 important, I think, for the benefit of the asset 15 recipients, eventually the beneficiaries. 16 A lot of the work we do has to do with things -- 17 with issues such as -- 18 INVESTMENT DIRECTOR SIMPSON: I think we should 19 move on. 20 MR. GRISWOLD: Move on. Yeah. 21 Well, a lot of the work we do is talking about 22 the very things that Hiro was talking about earlier, how 23 to integrate ESG into portfolios and how to get -- how to 24 get more value out of the management of funds. And he's a 25 good -- as I say, he's a good embodiment of some of the
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1 things that we talk about in that meeting. 2 Let me move on, as suggested. I get a little 3 windy sometimes. 4 --o0o-- 5 MR. GRISWOLD: This is a chart that shows the 6 U.S. share of GDP. And really what we're talking about 7 here is the rationale for going global in your equity 8 allocation. U.S. share in the 80s was over 35 percent. 9 Now, it's under 25 percent. 10 What does that suggest? 11 Well, clearly, if you're only invested in your 12 home market -- and there's a feature in most portfolios 13 called home bias. Investors traditionally, going back 14 many, many decades, have invested traditionally mostly in 15 their home market, because they felt more comfortable and 16 they understood the co-market, but also because they were 17 little -- perhaps a little risk averse, they may have been 18 a little fearful of going abroad. 19 And, in fact, up until just the last few decades, 20 really starting in the 50s and 60s, investing abroad was 21 difficult. It was much more expensive. And the results 22 were sometimes uncertain, partly because the regulations 23 in the company -- in the countries abroad were not clearly 24 understood, where they averse to investors from outside 25 their own countries. So that has changed enormously.
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1 CHIEF INVESTMENT OFFICER MENG: Yeah. I would 2 like to add one comment here. So in addition to the 3 percentage of GDP -- global GDP, there's another layer to 4 it. It is also the -- how deep the capital market is, 5 because the depths of capital market is not always 6 correlated -- positively correlated with the GDP share. 7 So, for example, China's GDP is second largest 8 economy. But the capital market adapts -- capital market 9 is not the second deepest in global capital market. So 10 just -- we always have to keep that in mind. 11 MR. GRISWOLD: Yes. The U.S. share of the 12 capital markets actually is 55 percent now approximately. 13 So our market is very deep. It's very large relative to 14 any other market in the world. And in a way, you almost 15 hope that shrinks over time, because, in fact, then you 16 will -- it will be a by-product of those markets that are 17 large, now getting large. But perhaps the depth and 18 breadth of those markets will cause those markets to be 19 more acceptable to investors around the world, and 20 including Hiro's fund and, of course, funds across Europe 21 and others in Asia that are beginning to really grow 22 enormously, sovereign wealth funds included. 23 So let's move on here. 24 --o0o-- 25 MR. GRISWOLD: Global equity allocation is really
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1 the ability to invest anywhere in the world. It isn't 2 that you're in your home market and then you add an 3 international component. A global investor is able to go 4 anywhere, invest anywhere. And typically, they are broken 5 down into three components, U.S. investment of course for 6 a U.S. investors, plus international developed market 7 stocks, and emerging market stocks. 8 This is a sort of the three-legged stool of 9 global investing. And, of course, those categories will 10 change over time as markets develop, countries become 11 larger because of their own internal business development, 12 and the size of their capital markets. 13 --o0o-- 14 MR. GRISWOLD: This is a chart that was developed 15 by actually a friend of mine Elroy Dimson when he was at 16 London Business School with two other academics. And it 17 was a book that called Triumph of the Optimists. It was 18 published in 2000. It was a fascinating book. 19 But basically, the idea was that the optimists 20 who invested in equities won over investors in other asset 21 classes, basically over fixed income, or anything, real 22 estate, what have you. And that was because of the growth 23 of the economies, the growth of these stock markets, the 24 growth of the companies they invested in. 25 And so over a period from 1900 until 2000 when
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1 the book was published, they looked at I believe it was 19 2 markets originally. Now, it's, I think, 23. And they 3 scoured the world for markets where you had a very long 4 history, a very long data set of equity returns that they 5 could produce these numbers from. 6 So this shows you going back in many countries, 7 most of them developed countries. There's most of Europe 8 there. Some outside, New Zealand, Canada, and obviously 9 the United States. But this is 100 now -- almost 120 10 years of data on how equities have beaten fixed income. 11 And, in fact, it is a great example of what we're talking 12 about and why you invest in global equities. 13 --o0o-- 14 MR. GRISWOLD: So the traditional rationale is 15 several-fold for investing in this asset class. 16 Obviously, we all probably know that diversification, 17 multiple asset classes, low correlations hopefully between 18 the various asset classes and strategies does provide a 19 lower portfolio risk overall. 20 If you think to the traditional rationale for 21 investing in private equity or private capital generally, 22 venture capital, other things, is that you're lowering 23 your portfolio risk, even though you're putting 24 individually risky asset classes or strategies together. 25 So global equity is the same thing, but in a
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1 slightly different way. Diversification regionally, 2 geographically is really lowering your portfolio risk. 3 You're capitalizing, as I said, on global economic growth. 4 You're increasing your breadth of opportunities for the 5 portfolio manager, including looking for market 6 inefficiencies. The Holy Grail is to find dislocations 7 and inefficiencies. That's Ben and his staff's job. And 8 they are -- they -- that consumes them all the time, where 9 can we find inefficiencies that we can exploit? 10 And, of course, you're taking advantage of market 11 cycles. You can vary your portfolio weights depending on 12 the region, or the individual country, or even a sector of 13 the industries that you're looking at from the investment 14 standpoint. 15 --o0o-- 16 MR. GRISWOLD: This, on the other hand, shows you 17 a long-term look at when the U.S. has beaten 18 international. So if you take the global equity universe, 19 you break it down between U.S. and non-U.S., this is what 20 you see over a long period of time. This goes back to the 21 1970s. It shows you those cycles. And more recently, of 22 course, the U.S. has outperformed international for the 23 last 10 years. We heard that from Hiro and from others. 24 But you've had times when valuation of a 25 particular -- of like either the U.S. or the international
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1 got up to a point where it was apparently too high, people 2 felt there was not much value to be gained in continuing. 3 So they shifted back to the other group of investment 4 markets, and, in fact, so you have a swing. 5 We're wondering right now, because the U.S., by 6 many measures, is fully valued or even overvalued, 7 depending on which measure you're looking at. The 8 cyclical Case-Shiller measure -- index being one, where 9 the ratio being one measure. A lot of people saying the 10 U.S. is overvalued versus international, and international 11 thus is undervalued versus the U.S. So will there be a 12 shift? We don't know. Nobody has a crystal ball. It's 13 existed longer than we know. 14 I was fascinated by Hiro's statement that the end 15 of last year was the first time in his experience that 16 everything went down. So perhaps something has changed 17 and we aren't going to see quite the rational shift that 18 most of these changes between the U.S. and international 19 would illustrate. That people see overvalue, they get out 20 that asset class, and they go into a different one. 21 Questions on any of this so far? This is fairly 22 basic stuff, I know. But I think it's good to take a step 23 back sometimes and look at your allocations and what are 24 the qualities of what you're looking for. And you as a 25 Committee, as a Board, as Anne said, have the
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1 responsibility for monitoring your staff, but also just 2 asking good questions, tough questions of anybody who's 3 talking about this. 4 CHAIRPERSON FECKNER: No requests so -- oh, just 5 as I say that. 6 Ms. Yee. 7 MR. GRISWOLD: You knew that when you said that 8 CHAIRPERSON FECKNER: Every time. 9 (Laughter.) 10 COMMITTEE MEMBER YEE: Thank you, Mr. Chairman. 11 So I wanted to just get your perspective about 12 whether there may be an opportunity for like this 13 heightened on emerging markets, given obviously the 14 volatility that we're seeing with respect to the other 15 buckets and -- or has it just -- has there just not been 16 enough progress with respect to, you know, those 17 countries, and certainly those opportunities with respect 18 to expecting that we could get outperformance in the near 19 term? 20 MR. GRISWOLD: I think as a group, emerging 21 markets is very varied, first of all -- 22 COMMITTEE MEMBER YEE: Yes. 23 MR. GRISWOLD: -- so there's no one answer. 24 Emerging markets contains China, which a lot of 25 people find quite odd, because China is now the second
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1 largest economy in the world. Some think it on a 2 purchasing power probably it's the largest. But, in fact, 3 it is -- in general, emerging markets have always been 4 more volatile, partly because they go through a much more, 5 if you will, dramatic economic cycle. And that affects 6 their security prices. 7 They're also subject, in many cases, to the trade 8 imbalances or trade hiccups that go on. The old 9 expression, the -- you know, the U.S. sneezes and 10 everybody gets a cold in the rest of the world, but that's 11 particularly true -- been true of the emerging markets 12 that are very dependent on trade, and partly because 13 they're very dependent on the commodities that they 14 produce. 15 They are -- they're smaller markets in many 16 cases, so they don't have the clout to -- or the 17 consistency. And many of their markets are very thin from 18 an equity standpoint. 19 Ben, do you want to comment further on that? I'm 20 sure you have some good insight. 21 CHIEF INVESTMENT OFFICER MENG: Yes. So exactly 22 like John has said that the definition of emerging markets 23 is very broad. As John mentioned, China is considered an 24 emerging market, so is Singapore and South Korea, and then 25 compared to other emerging market countries. And then in
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1 emerging market investment, we deal with additional layer 2 of risks such as the instability of the political system, 3 regulatory bodies, currency. As you know, the currency 4 has been very volatile market. 5 So these we all have to take into account when we 6 look emerging market investment opportunities in emerging 7 markets. 8 INTERIM CHIEF OPERATING INVESTMENT OFFICER 9 BIENVENUE: And I think the only thing that I would add to 10 that is just that when you look at this cycle of 11 outperformance, if you put up your international X -- or I 12 should -- like emerging markets, so international X 13 emerging markets, the outperformance of the U.S. is even 14 more pronounced. And largely, that's due to the dollar. 15 COMMITTEE MEMBER YEE: Yeah. 16 INTERIM CHIEF OPERATING INVESTMENT OFFICER 17 BIENVENUE: Now, the other side of that, and remember that 18 we're not looking in the rear-view mirror, we're looking 19 forward and trying to think about our allocation, the 20 reality is that emerging markets are cheap. 21 COMMITTEE MEMBER YEE: Yes. 22 INTERIM CHIEF OPERATING INVESTMENT OFFICER 23 BIENVENUE: Now, are they cheap and getting cheaper from 24 valuation standpoint? That's -- you know, as John said, 25 if we had a crystal ball, that would be really helpful,
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1 but we don't. But it is the case from an valuation 2 standpoint, their valuations are relatively low and 3 certainly they are a portion of our benchmark. 4 COMMITTEE MEMBER YEE: Right. 5 CHIEF INVESTMENT OFFICER MENG: And also, when we 6 look at emerging market, we also had to be mindful, some 7 people can break down emerging markets by commodity, 8 either importer -- net importer or net exporter, then 9 the -- or the super commodity cycle plays a bigger role. 10 For example, Brazil is a commodity exporter. 11 India and China mainly a commodity importer. 12 COMMITTEE MEMBER YEE: Importer, right. 13 CHIEF INVESTMENT OFFICER MENG: So depending on 14 which part of the commodity -- so commodity is one way. 15 And overall, are you net importer or exporter. So 16 emerging markets tend to be net exporter. So they are 17 exposed to the global economy, the volatility of the 18 currency, economic -- the commodity cycles, the 19 instability of the political system. So there's a number 20 of additional layers we need to consider. And that's why, 21 as John mentioned, tend to be more volatile than developed 22 countries. 23 MR. GRISWOLD: Very often, you're looking at the 24 risk side rather than the return side, when you're looking 25 at emerging markets, because the risks, as Ben said, can
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1 be multi-faceted, much more so than a much more developed 2 settled market. And so that contributes to the 3 volatility, because those people -- there's a bit more 4 emotion in there, if there's any fear -- fear and greed 5 will work against each more violently. If any worldwide 6 event happens, like '08, '09, and so you see tremendous 7 volatility. 8 Just an anecdote, when we were starting an 9 emerging markets fund many years ago at the firm I worked 10 for, we weren't investors that -- while the return over 11 many -- will volatile, you have to be a long-term 12 investor, really long term. I'm talking 15, 20 years to 13 really realize the steady growth of the economic 14 improvement in those -- in that sector. And indeed, that 15 has proven to be true. 16 So you're seeing this tremendous variation in 17 volatility, standard deviation, or what have you. And, 18 you know, hopefully it doesn't -- doesn't panic an 19 investment committee and pull out of that just at the 20 wrong time. And that's one of the things that we teach 21 university boards or the longest investors -- longest 22 horizon investors, use your long-term horizon to your 23 benefit. And that gives people a little thought -- 24 something to think about particularly. 25 And pension funds are some of the longest
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1 invention -- longest years -- your's is a perpetual fund 2 too. It is a huge advantage when you can ignore the 3 volatility and the panic of other investors, because you 4 will -- you could benefit from that occurrence. 5 Let's move on here quickly. Let me make sure I 6 State the -- what this is -- what this chart is. 7 --o0o-- 8 MR. GRISWOLD: It is a U.S. versus international 9 equity. So if you put them again together, they make the 10 whole global equity pie. But it shows you the difference 11 in volatility is these are rolling standard deviations of 12 monthly returns from 1970 on your far left. That says '74 13 there, so I'll say it's '74, to the end of 2018. 14 And what it shows you is the -- that individually 15 the international and the U.S., the volatility is quite 16 high. But if you put them together, that's the green 17 line, that shows you that together it makes my point that 18 I made earlier, your volatility is actually reduced most 19 of the time. Not always, but most of the time. 20 CHAIRPERSON FECKNER: We have another question. 21 Mr. Jones. 22 COMMITTEE MEMBER JONES: Yeah. Thank you, Mr. 23 Chair. 24 Yeah. Back to the general statement about global 25 equities. And I don't know recall what that number is,
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1 but over some period of time the number of public 2 companies where we have access to global equities have 3 been decreased by some 40 percent as I think I remember a 4 number. 5 INVESTMENT DIRECTOR SIMPSON: Yes. 6 COMMITTEE MEMBER JONES: And so my question is, 7 is that looking at our long-term philosophy, do you think 8 that that decrease in number of public companies where we 9 have access to global equities will continue to decrease, 10 and if so, what kind of thought you have about new 11 strategies to deal with the ever-decreasing number of 12 public companies in the marketplace? 13 MR. GRISWOLD: It's interesting. I appreciate 14 your question. I think Anne might be able to shed some 15 light on that too, because I think you've thought a good 16 deal about that as well. But let me just say from a -- 17 it's one of the -- it's one of the issues that this U.S. 18 Advisory Committee that I'm on at the CFA Institute has 19 been wrestling with. 20 There are various theories about why that's 21 occurring and what the ultimate result will be, if you 22 will, for investors. Clearly, it is disturbing to see 23 that. But what seems to be happening, at least in the 24 U.S., which is really more easily seen, but it's probably, 25 to some extent true, in all developed markets, is that
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1 companies feel it is more profitable to be private, to go 2 private, or the -- given the activity of private equity of 3 taking firms -- taking companies private has produced this 4 over time. 5 And, in fact, it has reduced the breadth of the 6 market. There's no question. The option are not easily 7 taken on, because you don't want to be regulating 8 something where you -- there would be lots of unintended 9 consequences potentially. 10 So, Anne, what's your thought about that too? 11 I'm not sure I've answered your question. 12 INVESTMENT DIRECTOR SIMPSON: Yeah. No. Thank 13 you very much. It's an excellent question. CalPERS 14 sits -- I represent CalPERS sitting on the SEC's Investor 15 Advisory Committee and we had hearings on this topic last 16 year. It's a global phenomenon. I think that's one thing 17 to note. And I think there were two lessons that came out 18 of the hearings. One is that the abundance, the supply of 19 finance in private markets means that companies don't need 20 to go to an IPO as soon as they might have done before. 21 So they're staying private longer and more of their growth 22 is happening in private markets. 23 And for many companies going public is a way to 24 monetize incentives, in other words, options for the 25 inside team for the management, and also to give an exit
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1 for the first and second round funders in the private 2 markets. Because the venture capital and the private 3 equity industry, they need the public markets, because 4 they need a place to go. They can have trade sales 5 through private market deals, but the public markets 6 really matter for the private markets. So that whole 7 issue of what are the public markets there for was really 8 center stage in the discussion. 9 Another issue was about the rising costs of 10 listings, which have gone from, you know, modest amounts 11 to several million dollars. And that's felt to be a 12 burden. And then there was also -- 13 MR. GRISWOLD: Extra regulation as well. 14 INVESTMENT DIRECTOR SIMPSON: Well, there was 15 a -- 16 MR. GRISWOLD: That's part of the cost. 17 INVESTMENT DIRECTOR SIMPSON: The listing costs 18 are -- 19 MR. GRISWOLD: Considerable. 20 INVESTMENT DIRECTOR SIMPSON: -- an item in their 21 own right. And you'll recall that there was some efforts 22 to lift the regulatory burden by giving exemptions to, you 23 know, certain rules and regulations to have a lighter 24 touch. But that doesn't seem to have been followed by a 25 surge in IPOs. So there's a real interest in say, okay,
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1 what's really going on in the wider economy, taking the 2 United States as the example. So the need for finance is 3 diminished. The type of industry, there's been a huge 4 transformation. And that in itself means that financial 5 capital is playing less of a role in company value. 6 I'll give you one data point that we were very 7 struck by. Thirty years ago, the S&P 500, which is, you 8 know, a very important index on the balance sheet, which 9 is a way -- one way to value a company, 85 percent was 10 fixed assets. So fixed assets 30 years ago were really 11 important. Fixed assets are expensive. You've got 12 equipment, and land, and inputs, and all the physical 13 things that could be valued on a balance sheet. 14 Fast forward to now, 85 percent of the S&P 500 15 balance sheet is what's called intangible. That means 16 brand. That means goodwill. That means human capital. 17 And so one of the projects that's come out of this SEC 18 work is actually looking at what is the reporting regime 19 that we need now to start capturing the value that's on 20 the balance sheet. And that includes the human capital 21 reporting initiative that CalPERS has played an important 22 role in. 23 So I think the question -- I think another thing 24 that came out at the hearings was a recognition that the 25 private markets do not have the same regulatory
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1 requirements, but there is a case -- some argued to the 2 hearing there is a case that the SEC's remit needs to be 3 extended further. 4 And you'll see that in the last round of 5 regulatory expansion, private equity firms, hedge funds 6 came under the umbrella of SEC regulation, which is one 7 step in that direction. But right now, there is, as John 8 said, a quiet life if you're in the private markets. But 9 there is also some concern to ensure that private markets 10 get better regulated, because, you know, a growing part of 11 the economy is growing that. 12 MR. GRISWOLD: And just to follow up on your 13 point about the reluctance or the delay in going through 14 an IPO process, that may be encouraged by the ease of 15 getting financing because of the easy money we referred to 16 earlier when Hiro was here. There's an enormous amount of 17 money sloshing around the world. And it is -- if you 18 don't have to go public and you can get financing from 19 private sources, the question is why would you bother 20 going public? It exposes you to all kinds of things that 21 you may not want to deal with. 22 And, in fact, that could be a serious issue that 23 might be -- I don't know how you solve that without -- 24 without going through the trauma that we started to go 25 through last year, that Hiro referred to, and I'm sure
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1 has, you know, happened, too. 2 Dan, you had a question -- you had a point too. 3 INTERIM CHIEF OPERATING INVESTMENT OFFICER 4 BIENVENUE: Yeah. I think it's a terrific question, Mr. 5 Jones. And the only comments that I would underscore is 6 that it is a global phenomenon, but it's especially 7 pronounced in the United States. And I would say less so 8 developed international, and even less so emerging 9 markets, where even you're not seeing the level of -- 10 nearly the level of shrinkage. It's also worth mentioning 11 that there are fewer companies public, but they are larger 12 companies. So the capitalization of the markets has 13 actually grown significantly, but it's just concentrated 14 in fewer companies. 15 That said, the growth of the private markets 16 relative to public markets is really where we're talking 17 about. You know, in some of your -- you know, I think it 18 was Andrew that mentioned yesterday just how much dry 19 powder is on the -- 20 INVESTMENT DIRECTOR SIMPSON: Right. 21 INTERIM CHIEF OPERATING INVESTMENT OFFICER 22 BIENVENUE: -- is on the sidelines around private markets. 23 This is one of the reasons why we're so focused on finding 24 a way to deploy more capital into the private markets is 25 that, you know, historically the Apples, and the Oracles,
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1 and the Genentechs went public as very small companies. 2 Now, these companies are staying. And so as an investor, 3 you could -- as a public markets investor, you've got 4 exposure to really early growth of those companies. 5 Much of that growth is now happening while it 6 stays in the private markets, which again is a rationale 7 for our desire to really deploy more capital, but in a 8 thoughtful way in the private markets. 9 MR. GRISWOLD: All right. Let's move on here. 10 COMMITTEE MEMBER JONES: So, yeah -- 11 MR. GRISWOLD: Oh, sorry. I'm sorry. Henry, 12 another question. 13 COMMITTEE MEMBER JONES: Yeah. No. So the 14 bottom line is, is that using Ben's analogy is that where 15 are we on the wave? You know, have we -- are we at the 16 crest where we -- it's time to get on and start moving 17 from global equities in a more strategic and advanced way, 18 or do we kind of wave -- the wave hasn't reached a crest 19 yet and just kind of stand back and monitor? 20 INTERIM CHIEF OPERATING INVESTMENT OFFICER 21 BIENVENUE: I think our thought on that really is thinking 22 more -- first of all more creatively about not thinking so 23 much on the asset class and thinking more about the 24 exposure that we're trying to get. So for us, this is a 25 lot of the work that Ben has been talking about around
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1 harvesting equity, public-private. It's -- when you think 2 about the exposure you're trying to get, you're exposing 3 yourself to earnings growth. You're exposing yourself to 4 economic growth. 5 So really, we want to be thinking about equity 6 and then thinking about if we believe the growth will be 7 more on the private markets, it's thinking about how we, 8 you know, position the public markets to kind of be a 9 liquidity source in some sense, which again is a lot of 10 Ben's focus around -- around the -- you know, this 11 liquidity dashboard and really thinking about how we 12 generate liquidity. 13 So I think the wave that we're looking at is that 14 we think there is more to come from a migration of capital 15 from public to private, and that's why we really want to 16 position ourselves to -- you know, to get more in private. 17 CHIEF INVESTMENT OFFICER MENG: Just on that 18 note, we are privileged CalPERS, because who we are. Our 19 size and brand, brand name really help us get access to 20 the top private equity managers. So not everyone equally 21 shared that privilege as we do. 22 --o0o-- 23 MR. GRISWOLD: Right. So this chart shows you a 24 very long -- this is again from Triumph of the Optimists 25 originally, but the data is updated yearly by Credit
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1 Suisse, who's their publishing sponsor. But it's an 2 interesting chart, because it basically shows you the 3 gross return on equities versus other asset classes. 4 Bills, bonds, and inflation are the other measures against 5 the equities. 6 The equities in the left-hand chart over that 7 period of 1900 to 2018, I believe, or '17, is, in fact, 8 9.4 percent. If you look to the right, you see it minus 9 inflation, and it's actually 6.4 percent. 10 So it's really quite astonish -- it's a somewhat 11 sobering chart in my mind. Because, in fact, over very 12 long periods of time, if you really want to talk to 13 somebody about being a long-term investor, 120 years isn't 14 a bad place to look at. 15 And in fact, in those numbers are some markets 16 that collapsed and disappeared for periods of time, 17 including Germany and Japan, of course, during the war, 18 and other -- in some other markets as well. 19 But, in fact, there is a huge gap because of 20 inflation. And inflation is sort of an insidious risk 21 that you have to take account of in any investment 22 strategy long term. This chart to me shows you that. So 23 it's a -- it is somewhat sobering statistic. It goes from 24 44,000 to 1,500 from -- nominal to real. 25 INTERIM CHIEF OPERATING INVESTMENT OFFICER
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1 BIENVENUE: John, can I make one more comment? 2 MR. GRISWOLD: Sure, absolutely. 3 INTERIM CHIEF OPERATING INVESTMENT OFFICER 4 BIENVENUE: Just go back to slide 9 really quickly. It's 5 just worth mentioning really quickly. 6 MR. GRISWOLD: Nine? 7 INTERIM CHIEF OPERATING INVESTMENT OFFICER 8 BIENVENUE: Yes, please. 9 And if you -- 10 MR. GRISWOLD: Here you go. 11 INTERIM CHIEF OPERATING INVESTMENT OFFICER 12 BIENVENUE: John said a couple of times, and I think it's 13 worth underscoring thinking as a long-term investor, note 14 that if you look at the United States and the endpoint of 15 this chart is from 1900 to 2010, so that 2010 endpoint is 16 after a 30-year bull run in the bond market, right, where 17 interest rates went from the mid-teens down into the low 18 single digits, and right after the financial crisis where 19 the equity market was at low, and still you can see that 20 with the United States with all the other countries also, 21 that equities still vastly outperformed bonds. 22 Now, bonds are a really important part of a 23 diversified portfolio. Jeff talked about that last week, 24 but it's also important that we continue to expose ourself 25 to equity, because that's where -- that's where the larger
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1 returns can be gained, though, with the volatility. 2 So I just thought I would mention that even with 3 that endpoint, thinking like a long-term investor is one 4 of the real advantages that CalPERS has. 5 But again, long term is -- here, is 110-year 6 perspective. 7 CHIEF INVESTMENT OFFICER MENG: And the challenge 8 with equity in the long run, if you can stick to it, the 9 history proves that it does deliver the premium over bond. 10 The challenge is the volatility and the drawdown 11 risk. And that's why the Investment Office so focused on 12 managing the drawdown risk with the next crisis comes, so 13 that we can continue to benefit from the equity premium -- 14 the return in equity premium. 15 So this all ties together why, as Dan mentioned, 16 that we're so fixated on having a plan, liquidity 17 dashboard, to protect ourselves against from the next 18 drawdown. In the meantime, we try to explore all the ways 19 that we can benefit -- we can expose to the equity 20 exposure, that be public equity or private equity. 21 --o0o-- 22 MR. GRISWOLD: All good points. 23 Other questions? 24 Okay. So this is from your own statement about 25 global equity. It's worth repeating. The primary role of
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1 equities is, “Total return oriented and to capture the 2 equity risk premium, defined as the excess return over 3 risk-free government bonds, by means of ownership risk in 4 companies and exposure to corporate earnings growth. The 5 major driver is appreciation, with some cash yield (growth 6 and liquidity)”. And that's from your website. 7 A very good statement. Probably more technical 8 than most people would understand, because the equity risk 9 premium is a calculated number that basically looks at 10 the -- at the advantage of equities over a risk-free rate, 11 which is usually use -- the one we use is -- normally is 12 treasury bills, basically, which is considered risk free 13 because the collapse of the United States would have to 14 happen before they would -- before they would be not able 15 to pay it off. 16 So they, yes, are very low right now, and, in 17 fact, could go negative at some point I suppose. So then, 18 you know, the -- but the fact is that there is almost 19 always a advantage gap, the risk premium that you take to 20 go into equities. And that's what you're trying to 21 harvest when you're going into global equities as well. 22 You're looking for those premia across the globe. 23 When you're a global investor, you can look at them in the 24 U.S. and look at them internationally. 25 But I want to go back to Henry's question,
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1 looking at global. One of the answers might be why you 2 stay with it is because you don't know which ones are 3 going to be moving in and out of the advantageous cycles, 4 but also you're looking -- it gives you the chance to look 5 for those premia where they exist. 6 And you may see different ways of taking 7 advantage of those available risk premia that occur and 8 even prevent -- trying to produce better returns through 9 either leverage or arbitrage strategies. You use 10 alternative beta in your portfolio to some extent to do 11 that. 12 So it's an -- it's an opportunity set that is not 13 available when you stick with your home market. You want 14 to stay well positioned to take advantage of opportunities 15 wherever they occur in the world. 16 This is a good statement -- as good a statement 17 as I've seen anywhere actually in the institutional 18 market. 19 --o0o-- 20 MR. GRISWOLD: So why? Again, you're looking for 21 price appreciation, cash yield, dividends. But primarily 22 it's the capital gain, the price appreciation that you're 23 really after in most cases in equity. 24 Risks. Clearly, economic risks, high sensitivity 25 to global economic growth and also anti-growth. If you
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1 have '08, '09 again, it was tough to stay with your equity 2 allocation. And a lot of people didn't, much to their 3 chagrin later on particularly if they were quote, 4 "long-term investors". 5 You clearly have to worry about liquidity. The 6 portfolio has got to remain highly liquid, particularly 7 when you're paying out the size of payouts that you do. 8 So clearly, you've got to figure that out. But that's 9 also another reason why you have fixed income and other 10 liquid sources. 11 CHAIRPERSON FECKNER: I have a question from Ms. 12 Taylor. 13 VICE CHAIRPERSON TAYLOR: Yes. Thank you very 14 much, Mr. Chair. Thank you very much. 15 When we get to risks, you have high sensitivity 16 to global economic growth variability. What do you -- 17 what does that entail? Does that entail the global 18 outlook in terms of geopolitics? Does that include our 19 ESG sustainable development goals? What does that 20 include? Is that just a very narrow it's only about 21 economic growth. 22 MR. GRISWOLD: No, it does include all of the 23 above. It -- what affects global economic growth, and 24 that's happening now, can be any manner of geopolitical 25 events, and statements, and, you know, this -- the
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1 tariffs, the trade controversies that we're going through 2 now are affecting -- are really affecting economic growth 3 globally. You're seeing growth slow down. 4 People are worried that if this battle continues 5 between U.S. and China over that, that it will further 6 affect growth globally. 7 So you can't separate that entirely. There are 8 obvious ones. There are less obvious once. Clearly, 9 there are industries which are growing, sort of 10 organically and others that are declining organically for 11 other -- for reasons that they don't have the economic 12 reason to be any longer. It's kind of the old buggy whip 13 argument. And, you know -- 14 VICE CHAIRPERSON TAYLOR: Right. 15 MR. GRISWOLD: -- as AI takes over, you know, 16 information sources are going to change and the generation 17 of information will change. 18 It's extraordinary, you see that actually in the 19 investment business. That business is changing because 20 big data comes in, AI machine learning are applied to that 21 data, and the decisions made by the portfolio managers are 22 made in a different manner than they were 20 years ago. 23 It is changing. It's changing the environment. 24 VICE CHAIRPERSON TAYLOR: So in -- 25 MR. GRISWOLD: And the skill sets that you're
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1 looking for in your new employees are different than the 2 skill sets you were looking for even 10 or 15 years ago. 3 VICE CHAIRPERSON TAYLOR: And so then consider 4 that in the financial market. And I noticed -- it was 5 spoken before in our previous class with AI and everybody 6 taking account of this, and I don't know that our job as 7 pension investors is particularly -- but we need to be 8 concerned about this gig economy kicking up, AI replacing 9 workers. What -- or displacing workers. What are we -- 10 are we helping the capital markets face this, you know, 11 though our own investments or are we sort of sitting by 12 and watching it happen, and hoping the capital markets 13 take account of our possibly very soon displaced workers 14 that -- you know, in consumer America that makes up a lot 15 of what our GDP is, so... 16 MR. GRISWOLD: Well, all I can tell you is I do a 17 lot of work with universities. They're facing the same 18 question, because they're seeing a demographic drift -- 19 drip in their student population now. And they're saying 20 how can we -- how can we train and educate the next 21 generation of students to become part of the workforce? 22 That is a big question, and it's a very good 23 question. No one has a clear answer to it yet. A lot of 24 optimists are saying, even with the growth of robotics, 25 AI, machine learning, et cetera, there will be plenty of
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1 jobs, because -- 2 VICE CHAIRPERSON TAYLOR: I'm not sure about 3 that. 4 MR. GRISWOLD: But the jobs will be different. 5 VICE CHAIRPERSON TAYLOR: Yeah. 6 MR. GRISWOLD: I mean kids now are being trained 7 by universities in code -- coding. 8 VICE CHAIRPERSON TAYLOR: Yeah, but not everybody 9 can be a coder. 10 MR. GRISWOLD: Not everybody can be a coder. 11 That's right. But there will always be need for 12 communication, for clear thought, common sense, all those 13 good things that liberal arts teaches you. 14 And I speak to a lot of university boards and do 15 some consulting with them. And that's always an 16 interesting question to get into is how is that university 17 or how is that college or school adapting to the new 18 realities, and how do they incorporate that into their 19 curriculum? You know, there's no easy answer. 20 VICE CHAIRPERSON TAYLOR: It just seems to me 21 that it is something we need to be forward-thinking on -- 22 MR. GRISWOLD: I agree. 23 VICE CHAIRPERSON TAYLOR: -- as an institutional 24 investor that does invest in the entire index. I think 25 it's very important that we -- we find out a way that we
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1 can help folks look at this. I don't know. I think it's 2 really important. 3 INTERIM CHIEF OPERATING INVESTMENT OFFICER 4 BIENVENUE: Can I -- I'll just make a -- I think it's a 5 great point. I'll make a couple of comments. 6 First to your most recent question and then also 7 to your previous one, because they're both great 8 questions. With regard to AI, Beth and her team -- and 9 she did a collective process around the Investment Office, 10 but she did a whole project recently. One of the two main 11 research projects she did in this most recent fiscal year 12 was on disruptive technology, and AI was certainly a 13 portion of that. 14 So it is something we're spending a lot of time 15 thinking about. There aren't clear answers. But it is 16 something that is -- that is critical and it will have an 17 impact. 18 On your previous questions around economic 19 growth, this is one of the reasons why we spend so much 20 time on thinking about the economy and having John 21 Rothfield here and otherwise. When you think about 22 equities, ultimately the way that equities make money is 23 off of earnings. And earnings, right -- I mean, an 24 equity, as John said earlier, is a pro rata ownership in a 25 company. Earnings are what drives the value of that
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1 ownership, right, that company's ability to earn money. 2 VICE CHAIRPERSON TAYLOR: Right. 3 INTERIM CHIEF OPERATING INVESTMENT OFFICER 4 BIENVENUE: Those earnings are based on economic growth. 5 So this is all these things that you're talking about, 6 whether people have money to spend, what -- you know, 7 consumers, whether -- whether there are new productivity 8 things, things that drive the economy, and all of these 9 things, whether it's ESG and otherwise. 10 And I couldn't agree more with what Hiro was 11 saying earlier that this is why for us ESG is an important 12 factor. We look at it through the lens of an investor. 13 It's about how is it going to drive earnings growth and 14 otherwise. But it will result in impacts on our 15 investment return, and that's why we need to be thoughtful 16 in this space. 17 VICE CHAIRPERSON TAYLOR: Thank you. 18 --o0o-- 19 MR. GRISWOLD: So let's take a quick look at your 20 total fund allocation. You can see global equities 50.2 21 percent. Fixed income on the left, 28.7 percent. Private 22 equity 7.2. So, in effect, equity -- and you have real 23 assets, 11 percent. So a good portion of that you could 24 consider equity, but it may be both. So, in fact, you are 25 heavily allocated to the equity side of the fence. And
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1 that's really what you see in most large institutional 2 investment portfolios. Because they have been trained to 3 look for the opportunities for growth. And you need to do 4 that if you're going to keep the contribution of the 5 investment fund to the income you need to -- liquidity et 6 cetera that you need to pay your beneficiaries. 7 CHIEF INVESTMENT OFFICER MENG: Yeah. I'll add 8 one comment to it. You often hear the term 60/40. So our 9 portfolio refers to 60 percent equity, 40 percent fixed 10 income. So if you look at our portfolio allocation now, 11 it's not that different from 60/40. So we have global 12 equity -- if you put global equity and private equity 13 together, it's close to 60 percent of equity exposure. 14 And if you think of our real assets, our objective mandate 15 of the Real Assets Program is core -- U.S. core. 16 So that acts similar to a fixed income. So if 17 you add our fixed income and real asset allocation plus 18 liquidity together, it's about 40 percent. So our 19 portfolio is quite similar to 60/40 that what you often 20 here in the media and in the context in our conversation 21 with other peers. 22 MR. GRISWOLD: Right. 23 --o0o-- 24 MR. GRISWOLD: So the global investment -- global 25 equity investment philosophy of CalPERS is really a --
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1 they are very difficult to predict. We talked about 2 that. The alpha opportunities are multi-faceted and time 3 varying. They do change, so you have to be very nimble. 4 If you're going to invest globally, particularly in 5 emerging markets where you are -- you do see more 6 volatility and more cyclical shifts. 7 But you can take advantage of that as well. 8 There is -- there is a good portion of the job of global 9 allocation, of global equity investing, which is looking 10 for opportunities in terms of cyclical changes which 11 occur. Focus finally on holistic portfolio net of costs. 12 I just mentioned 80 percent of the portfolio invest in 13 costs-efficient internally-managed strategies. 14 Now, I'll let Ben and Dan talk a little bit about 15 that, why that's the case. 16 CHIEF INVESTMENT OFFICER MENG: Yeah. So I leave 17 the cost to Dan. But I'd actually like to comment a 18 little bit on the alpha opportunities. So if you look at 19 the four major asset class we invest in, global equity, 20 global fixed income, private -- excuse me -- private 21 equity and the real assets, one can argue the most 22 efficient market is global equity. 23 So the alpha opportunity -- in the most efficient 24 market, the alpha opportunity I would say not just time 25 varying is, you know, being -- to a certain extent is
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1 illusive. So capturing the alpha in the most efficient 2 market segment is very challenging. 3 So instead, we focus on what -- at least our plan 4 in the most efficient market -- markets, we tried to focus 5 on the -- controlling the risk with tracking error and 6 then reducing operation cost. So it's -- on the cost 7 part, I will leave it to Dan. 8 INTERIM CHIEF OPERATING INVESTMENT OFFICER 9 BIENVENUE: Yeah. So this speaks to Ms. Olivares question 10 previously around some of the questions on fees. For an 11 organization that's largely externally managed, that cost 12 structure is more difficult. As we said, you know, with 13 80 percent internal managed, it gives us a real advantage. 14 And the whole global equity portfolio runs at about 8 15 basis points. And that's been on a downward trend from 16 maybe mid-teens. Actually, maybe in the 20s when I got 17 here to down to -- you know, into the mid-teens, and now, 18 as I say, into 8. And I think we're on the path to -- I 19 don't want to set myself up. But my goal would be in the 20 next few years to be down into the -- into the mid to low 21 single digits for global equity. 22 And that's -- and that's what we've -- that's 23 what we've seen from a standpoint of our trajectory, 24 because, I mean, Investment Belief 8, which is one of our 25 ten Investment Beliefs, we know that the opportunity for
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1 alpha, and markets will bounce around, but costs are 2 always a headwind. They're always negative, and so we 3 manage those very closely. 4 MR. GRISWOLD: And you've been very successful 5 from what I've heard and seen -- or read and seen in your 6 literature that -- in being able to reduce those costs. 7 In general, by the way, the investment business, because 8 of the growth of passive investment, index-based 9 investment, whether it be index funds or ETFs are highly 10 cost-efficient vehicles. Those have been aided by the 11 bull market we've been in for 10 years. No question. 12 And investors are saying why should I pay 30, 40, 13 50 basis points or more for active investment when, in 14 fact, they've been losing to passive investments. 15 They're really talking about equities because 16 that's the most efficient market. In fact, though, that 17 trend has been affecting everything in the investment 18 business. It's been shrinking the business to some 19 extent, because you -- it is no longer -- on long-only 20 strategies like U.S. equities, no longer a viable business 21 to be an active manager unless you're -- you've got some 22 edge. You've got some distinctive way of making money so 23 that you're attracting new business. 24 CHIEF INVESTMENT OFFICER MENG: So on the note 25 the cost, I just would like to compliment our Investment
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1 Office. Close to 80 percent of our assets are managed 2 internally. And we have been running one of the most 3 efficient asset management from that perspective, cost 4 efficient. 5 As Dan said, the Global Equity Program is only 6 about 8 bps. And we are still -- we're not stopping 7 there. We're still finding ways to reduce that cost. And 8 in real assets, Paul Mouchakkaa can tell you, we're trying 9 to bring -- changing -- we have changed our business model 10 for better control and lower cost. And then again, the 11 innovative ways we're trying to explore -- explore in 12 private equity the Pillar 3 and Pillar 4. One of the 13 goals is to reduce cost, and more transparency, and reduce 14 cost. 15 So we're very proud of the efficiency the 16 Investment Office is operating now, but we continue to 17 look for other ways to reduce cost. 18 INTERIM CHIEF OPERATING INVESTMENT OFFICER 19 BIENVENUE: Yeah. And I'm sorry. Ben, I'm really glad 20 you mentioned that, not to just single out global equity, 21 because it is the case that some of the -- you that have 22 been on the board for a while remember that our cost 23 structure was north of 1 and half -- you know, approaching 24 $2 billion dollars years ago. Now, we're down in the sort 25 of $1 billion range on total fees. And again, that's on
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1 an AUM that's much higher. Part of that is this focus on 2 costs. 3 The fixed income portfolio is over 90 percent 4 internal managed. And I think that runs at -- you know, 5 Arnie will have an update next month, but it's -- it's 6 lower than global equity. I think it's down in the sort 7 of 5 basis point range. Private equity has done a ton of 8 work this. Real assets, like Paul -- you know, Ben 9 mentioned, you know, we're a lower cost than our peers and 10 what the benchmark computes. So lots of work on cost. 11 It's been a critical focus across the asset classes. 12 MR. GRISWOLD: Yeah. I think the private markets 13 are an area where you'll see -- as Hiro said, you'll see 14 more work being done with innovation to get those fees 15 down, so that you're aligning the manager -- the GP's 16 interests with the -- with the investors, with the asset 17 owners more and more. 18 That may be -- we may be seeing the last of the 19 sort of the great halcyon days of private equity in some 20 respects. But they're still -- still able to make a lot 21 of money staying shoulder to shoulder and resisting a lot 22 of the changes that have been proposed. 23 CHAIRPERSON FECKNER: A quick question from Ms. 24 Olivares. 25 COMMITTEE MEMBER OLIVARES: Thank you, Mr. Chair.
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1 So as we talk about the basis points that are 2 paid out to manage some of these funds - 8 bps is 3 relatively know - when I think of how we would apply that 4 fee externally -- so if I was to go buy an index for the 5 S&P 500 and pay 8 bps, that covers all of their 6 operational expenses, right? 7 CHIEF INVESTMENT OFFICER MENG: (Nods head.) 8 COMMITTEE MEMBER OLIVARES: So if we say that our 9 cost is about 8 bps, does that cover operational and 10 investment expenses as well, like personal costs, real 11 estate, everything? 12 INTERIM CHIEF OPERATING INVESTMENT OFFICER 13 BIENVENUE: Yes. So there's a whole cost allocation 14 structure. But we get a set of costs that -- from the 15 enterprise that includes the -- you know, all the work of 16 the rest of the enterprise. Then there's the cost of our 17 own fees, which we do have some active management that 18 includes fees. We also have some sort of model provision 19 strategies, where we're actually managing against a 20 factor, but we do pay for that sort of factor provision. 21 And then also our own headcount and everything else, 22 technology, all of the above. So, yes, that 8 basis 23 points is a fully loaded number. 24 COMMITTEE MEMBER OLIVARES: Great. Thank you. 25 I'd love to get more information on that.
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1 INTERIM CHIEF OPERATING INVESTMENT OFFICER 2 BIENVENUE: We'll have more next month with the global 3 equity program review and happy to -- happy to dig in as 4 you -- as you see fit. 5 COMMITTEE MEMBER OLIVARES: Thank you. 6 CHAIRPERSON FECKNER: Go ahead. 7 --o0o-- 8 MR. GRISWOLD: Did I miss a space? 9 No. Okay. No, we're -- I think we're good. 10 This is just some of the -- we threw in some 11 charts that are more sobering than others. But, in fact, 12 you have -- over a long period of time here, you've seen 13 the U.S. clearly outperform non-U.S. stocks. It doesn't 14 diminish the fact that the diversification benefit and the 15 ability to find inefficient markets outside of the U.S. is 16 very valuable to the global investor. But you have had a 17 long period where the U.S. has outperformed. 18 That has obviously benefited some people more 19 than others. But, in fact, you could -- as you do see 20 there, you do see periods where international stocks do 21 better, or at least relatively. And then you -- this, of 22 course, is looking -- looking back in the past. So you 23 don't know what the future is going to hold. But clearly, 24 you have benefited from being in this market where the 25 economic growth has been extraordinary and the equity
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1 returns have been extraordinary as well over a long period 2 of time. 3 --o0o-- 4 MR. GRISWOLD: The other side of that is that you 5 do have more correlation between the two, you know, U.S. 6 and international markets. This chart shows you that. 7 This is the top -- the blue line is the U.S. versus 8 non-U.S. stocks. The red line is U.S. stocks versus U.S. 9 bonds. So there's a lot less correlation. I go back to 10 Dan's point, Ben's point that the -- that's why you have 11 fixed income, because there is that lack of correlation 12 that you want to count on, particularly when things get 13 rough like they did in '08, '09 when the bonds literally 14 saved a lot of people's bacon and provided the liquidity 15 they needed to get through that. 16 I can remember Harvard University having to go 17 out into the public debt markets to be able to pay their 18 staff during that period. It was very painful, because 19 they were subject to capital calls with their enormous 20 percentage of I private equity and venture capital. And 21 they were really squeezed. There were in a liquidity 22 squeeze. 23 So good to have fixed income, good to have 24 liquidity in different vehicles that you can count on if 25 you do get into problems. But this shows you the change
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1 that's quite dramatic in both cases of the correlations. 2 Okay. Did you have a point there? 3 Okay. 4 --o0o-- 5 MR. GRISWOLD: So let's talk about benchmarks 6 briefly. I think Hiro covered benchmarks extraordinarily 7 well in his remarks, so I'm not going to delve too deeply. 8 But clearly, you heard this from Jeff Bailey a month ago. 9 He talked about the types of things that you want to see 10 in a benchmark. 11 --o0o-- 12 MR. GRISWOLD: You use a benchmark which is a 13 customized benchmark from FTSE Russell. And I'll let Ben 14 and Dan talk about any details here -- in detail, if you 15 have questions on it. 16 But fundamentally, these -- these characteristics 17 of benchmarks should be present. They are -- everybody 18 has to be understanding of what the benchmark is. And in 19 principle, I just want to talk about that. We can talk a 20 little bit about -- by the way, that list of 21 characteristics is in the Primer for Trustees that you all 22 received - and if you didn't we'll make sure you do - from 23 the CFA Institute library. It's published by CFA 24 Institute Foundation. 25 But it's a terrific book for trustees of
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1 institutional funds. But all of these characteristics 2 should be present in an index that you choose -- benchmark 3 you choose. 4 --o0o-- 5 MR. GRISWOLD: The custom benchmark, Ben or Dan, 6 do you have any comments on this or are there any 7 questions on this? You've seen this before, so I don't 8 want to dwell on it too long. 9 But, in fact, you've got a customized benchmark. 10 Benchmarks are developed by really three primary 11 producers, MSCI, FTSE Russell, and -- what's the third I'm 12 thinking of? Not Bloomberg, but they have one too now. 13 There's another large -- I'll think of it in a minute. 14 I'm having a brain freeze. 15 INVESTMENT DIRECTOR SIMPSON: FTSE Russell 16 combined. Maybe that's what -- 17 MR. GRISWOLD: No, there's actually a third one, 18 but I have to think of it. 19 INTERIM CHIEF OPERATING INVESTMENT OFFICER 20 BIENVENUE: Are you talking about the old S&P IC? 21 MR. GRISWOLD: Yeah. Yeah S&P. Thank you. 22 I think the interesting thing here is the size of 23 the United States allocation, if you will, in the 24 benchmark reflects its capital -- world capital market 25 share.
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1 And, in fact, if you'd looked at this, and I 2 think you can, on the FTSE Russell website, they have a 3 PAR chart of the original FTSE all-world. It was called 4 something different then in 1987. And in that one, U.S. 5 was 27 percent not 54 percent. And guess which market was 6 35 percent in 1987? 7 Japan. 8 And those of you who remember the automobile 9 industry in the late eighties being taken over by 10 Japanese, Toyotas and Datsuns, and Suzukis and so forth, 11 they were ascendant at that time. But this does change. 12 And, of course, the benchmark that you use to judge 13 whether you're succeeding or failing versus a previous 14 regime has to be thought of in terms of the economic 15 shifts that are going on around the world. 16 These numbers change and your benchmark has to 17 change. And it's -- you want to make sure that you, as a 18 Committee, are looking at the right benchmark. 19 CHIEF INVESTMENT OFFICER MENG: So just on the 20 left chart, back to your earlier point John I made, the 21 United States percent of global GDP is about 25 percent. 22 But the percent of the market cap share is 54 percent. 23 And China is the second largest economy called -- 24 depending on which measure you use. Some are between 15 25 to 20 percent of global GDP. It does not even command its
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1 own category on this capital market. So that just shows 2 the share we invest in capital market. And when we look 3 at benchmark, we have to mindful both of the GDP, the 4 economic growth and other depths -- the depths of the 5 capital market. 6 MR. GRISWOLD: That's true. 7 INTERIM CHIEF OPERATING INVESTMENT OFFICER 8 BIENVENUE: The one other thing I would add to that is 9 also demographics, which is another important point. And, 10 you know, we referred to it earlier. 11 MR. GRISWOLD: Yeah, we've got one chart on that, 12 but I'll comment on it, a little bit, but that's 13 absolutely right. 14 INTERIM CHIEF OPERATING INVESTMENT OFFICER 15 BIENVENUE: It just -- it's another lens. 16 MR. GRISWOLD: Right. But if you -- if you're 17 interested in China itself, then -- and vis-à-vis this 18 chart, there was an article in the journal I think 19 yesterday on China opening up its markets through the A 20 shares primarily, which have been around for a long time 21 for foreign investors. 22 But clearly, you have to be very aware of how to 23 do due diligence in China versus other markets, because 24 there's a whole layer of different control from obviously 25 a political and economic standpoint than really almost any
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1 other market that you're looking at, certainly any other 2 large market. 3 And it's astonishing that you don't see -- I was 4 going to make a comment on that, but thank you, Ben. 5 Astonishing you don't see China in that capital market 6 list. But that's the fact today and you probably will see 7 it soon, I would imagine. 8 --o0o-- 9 MR. GRISWOLD: So looking ahead. We've just sort 10 of summarized some of the -- some of the things that we've 11 been talking about. We are seeing changes in the world 12 economy, which are going to change the opportunities and 13 the challenges in global equity investing. You're seeing 14 slowing growth in the world's economies now for a lot of 15 reasons. We talked about some of them. 16 Flatter lower returns for global equities, that 17 has been predicted for some time. In fact, the U.S. has 18 been a surprise in how good our returns have been on 19 average. Yes, you've had bumps like last year. But 20 overall, this bull market is now the longest expansion in 21 our history. And, in fact, can continue now as far as we 22 know, but with clearly increasing risks in certain areas 23 that you have to be aware of. 24 And we refer -- Hiro referred to it earlier. One 25 of the big ones is how long can they central banks
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1 continue this easy money rate suppression policy that 2 we've been living under for 10 years now? And what is the 3 ultimate risk of trying to normalize interest rates, 4 discount rates in the world economic and monetary system? 5 There are probably unintended consequences that 6 we still haven't seen out of that whole regime. The 7 future inflation interest rates are uncertain. We don't 8 have a way of predicting those particularly well, even 9 though the central banks can forecast or can hint as to 10 what their policies are going to do. You still don't know 11 where exactly those are going to go. 12 Central bank intervention may distort cyclical 13 market cycles. It already has. It is certainly affected 14 a lot of consumer rates and commercial rates of borrowing 15 and lending that are both stimulative, but also a little 16 scary, because you -- there is a shadow banking 17 unregulated pool of funds floating around that can be -- 18 can be really opportunistic for companies to borrow or 19 individuals, but also can be somewhat scary because you're 20 not share whether those are going to be withdrawn at any 21 point or what the lenders will do if there is some sort of 22 a break in the markets. 23 Increasing geopolitical tensions. Clearly, we've 24 seen that in the headlines. They may impact returns, 25 obviously due to trade threat and tariffs. And, of
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1 course, Dan mentioned demographic shifts. 2 --o0o-- 3 MR. GRISWOLD: Let me just show you one chart 4 that's a demographic chart. This shows you a projection 5 out to 2100 of the demographics of the U.S. workforce. 6 And, in fact, you're going to see a steady increase, slow 7 but steady increase, protected for that by experts in the 8 U.S. government, basically. It's the Population 9 Division -- Population Projection Division. 10 If you looked at most of the major developed 11 countries in the world, Japan, most of Europe, China too, 12 you see that line from 2000 say 20 begin to go down in 13 varying amounts very rapidly. 14 So the aging -- and Hiro talked about that 15 extensively, so I won't go into it in detail. But when 16 you see that around the world in the developed markets, it 17 is a little alarming. Because, in fact, the birth rates 18 in those markets are dropped -- they've dropped to the 19 point where they're not replacing the workforce. These 20 are ages -- by the way, workforce is defined as age 20 to 21 64. 22 So in many countries that are -- where the 23 biggest economic activity is going on, their demographics 24 are not favorable to continuing long term to maintaining 25 their workforces. It's a major concern on a long-term
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1 basis. And as long-term investors, I think it's one of 2 the issues -- one of the risks that you have to take into 3 account, where are you seeing those shifts more rapid -- 4 occur more rapidly than you were anticipating, or where 5 can you take advantage of that? 6 It was interesting. I went to a conference in 7 Tokyo a years ago. And one of the presentations was by a 8 professor who had developed exoskeleton. I don't know if 9 you know what an exoskeleton is. But if you think of a 10 beetle, a beetle has an exoskeleton. It's an external 11 shell. In this case, it was a motorized very 12 sophisticated piece of equipment that an individual could 13 put on. And it was almost like the Avengers. You could 14 do a lot of things that you couldn't do. It had 15 extraordinary, et cetera, because you had these little 16 motors helping you move, and picking things up, and so 17 forth. 18 He developed that in anticipation of Japan's 19 demographic projection, because it would allow older 20 workers to work. Now, that's extraordinary. But it's a 21 good small little example of what the innovation to try to 22 deal with the aging population Japan might look like or 23 anywhere else for that matter. 24 CHAIRPERSON FECKNER: We have a question from Mr. 25 Jones.
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1 COMMITTEE MEMBER JONES: Yeah. Thank you, Mr. 2 Chair. 3 Yeah. Going back to your comment about shadow 4 banking. Is that prevalent in the U.S.? I understood 5 that to be a problem in foreign countries. But is that a 6 major issue in the U.S.? 7 MR. GRISWOLD: I don't think so, but it's 8 certainly -- based on the number of emails all of us get 9 from lending institutions we've never heard of before, 10 there's a lot of lending going on outside of banks. And 11 we all know the trouble banks have been through coming out 12 of the 08-09 period. I don't want to be alarmist, but in 13 fact there is a lot of money being lent by off-radar 14 institutions and private individuals. 15 A lot of the funding of start-up companies done 16 by angel investors now are very small private syndicates. 17 And I think that -- I don't know the size of that, because 18 it's not measured. But, in fact, there is a lot of money. 19 We know that, because the central banks have been printing 20 it for a long time. And where is it going? 21 INTERIM CHIEF OPERATING INVESTMENT OFFICER 22 BIENVENUE: Yeah. The only -- the only thing I would add 23 is that it's a -- there's a -- there's a definitional 24 question there how you define shadow banking, right? 25 I will say that a lot of the risk we think has
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1 come out since the financial crisis, where so much more 2 regulation came into place around, you know, lending and 3 things like that. 4 But depending on how define shadow banking, you 5 can include even like hedge funds and things like that. 6 MR. GRISWOLD: Dodd-Frank covered a lot of those 7 areas clearly. And, you know, so it -- as I say, I don't 8 want to be alarmist at all. But, in fact, there are -- 9 it's one of those things that you think about and you 10 don't really know how to quantify, so it's difficult to 11 tell. But there are -- there's evidence of lending going 12 on and borrowing, and how much leverage is in the mix that 13 we can't measure. And so you can't -- what you can't 14 measure, you can't regulate. Don't know. But, in fact, 15 don't want to end on a down note, because we are out of 16 time. 17 INVESTMENT DIRECTOR SIMPSON: Oh, well, you can 18 end with the glossary. 19 MR. GRISWOLD: Oh, the glossary. 20 (Laughter.) 21 MR. GRISWOLD: Yeah, actually -- 22 INVESTMENT DIRECTOR SIMPSON: Knowledge is power. 23 MR. GRISWOLD: I don't think we need to go 24 through it page by page. 25 INVESTMENT DIRECTOR SIMPSON: Not, but I though
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1 you could have a nice cheerful slide up for your final 2 remarks. 3 All of the mumbo jumbo that goes into talking 4 about investment, we decided it was time to start breaking 5 it down. We made this promise in another governance 6 workstream to put things into plain english. So we've had 7 a first crack at the back of this presentation. And you 8 can tell us where we've got it right and where we've got 9 it wrong. 10 But it's part of a new practice. We want to 11 start explaining everything. And if we can't explain it, 12 we shouldn't have it on a slide. So that's -- that was 13 the thinking -- 14 MR. GRISWOLD: Um-hmm, that's true. 15 INVESTMENT DIRECTOR SIMPSON: -- behind having a 16 glossary. 17 MR. GRISWOLD: Yeah. One of the jobs that I had 18 at the Commonfund was to try to make the complex simple 19 and explicit in plain english. I was actually an english 20 major in college. And how I ended up in the investment 21 businesses was quite -- was another story. But, in fact, 22 Peter Bernstein was one of my heroes in this business was 23 also an english major. I find out -- I found out. We 24 were talking at lunch one day. 25 CHIEF INVESTMENT OFFICER MENG: So he's the
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1 author of the book When Genuius Failed, so -- and he's 2 author for a number of books. But I think the most famous 3 one is When Genius Failed. 4 MR. GRISWOLD: The Story of Risk. 5 CHIEF INVESTMENT OFFICER MENG: The Story of Risk 6 and When Genius Failed. 7 MR. GRISWOLD: Capital Ideas, a whole bunch of 8 books. There are a number of people that I think define 9 great thinkers in this business. I may be sitting next to 10 one or two here. But, in fact, Charlie Ellis who wrote -- 11 I don't know if any of you ever read any of his books, but 12 me wrote the famous book called Winning the Loser's Game. 13 And, in fact, it talks about -- Charlie is one of 14 my good friends, but he drives me a little crazy, because 15 he ran the investment committee at Yale University for 17 16 years. 17 CHIEF INVESTMENT OFFICER MENG: You know you're 18 on record on YouTube, right? 19 MR. GRISWOLD: I know. Yes, I do. 20 INVESTMENT DIRECTOR SIMPSON: He's been to speak 21 to the Board. 22 MR. GRISWOLD: He has been -- he's been -- he is 23 one of -- he's one of the great figures in investing, and, 24 in fact, has talked about indexing probably ahead of 25 anyone else in this country, and for all the good reasons
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1 you're hearing now, but he was doing this 10 years ago, 2 more. 3 But he ran the -- he ran one of the most 4 successful active management groups, which was the Yale 5 Investment Office as head of their committee for many, 6 many years, more than 15 years. I think it was 17 years. 7 And during that period, you know, was the top -- I think 8 the top institutional investor globally for a long time. 9 But he is fan of indexing, which just shows you 10 the change in how the environment in investing has changed 11 over that period. But Charlie was one of the people who 12 was predicting it in his book, Winning the Looser's Game 13 was -- which has come out in various editions, was 14 predicting that or talking about that. It was based on a 15 tennis game, playing defense. 16 I think we've -- I think we've exhausted 17 everybody, but... 18 INVESTMENT DIRECTOR SIMPSON: It might be time 19 for some questions. 20 INTERIM CHIEF OPERATING INVESTMENT OFFICER 21 BIENVENUE: Are there further questions, Mr. Chair? 22 CHAIRPERSON FECKNER: There are no questions 23 right now, no. 24 INTERIM CHIEF OPERATING INVESTMENT OFFICER 25 BIENVENUE: Okay. Then I think we can conclude it there.
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1 But definitely, John, thank you very much for joining us. 2 CHAIRPERSON FECKNER: All right. Thank you very 3 much for being here. 4 INTERIM CHIEF OPERATING INVESTMENT OFFICER 5 BIENVENUE: Thank you for your time. 6 (Applause.) 7 CHAIRPERSON FECKNER: We appreciate that. 8 Anything else, Mr. Meng? 9 CHIEF INVESTMENT OFFICER MENG: No. No. 10 CHAIRPERSON FECKNER: All right. We do have one 11 request to speak from the audience, Dave Elder, but I 12 notice he's not in the room. 13 Here he comes. 14 Hurry on down, Mr. Elder. It's your turn. 15 It's your turn, Mr. Elder. We have your handout 16 already, by the way. Please identify yourself for the 17 record and you'll have up to three minutes to make your 18 comments. 19 CHAIRPERSON FECKNER: They're on. 20 MR. ELDER: Good afternoon, everyone. 21 CHAIRPERSON FECKNER: Good afternoon. 22 MR. ELDER: My name is Dave Elder. I'm a former 23 State Assemblyman. I served 10 years as the Chairman of 24 the PERS Committee. I carried legislation setting up the 25 prefunding account for health benefits. And I carried a
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1 number of the bills, 2 percent at 55 retirement formula, 2 and 2.5 at 55 for correctional officers, so I had about 3 200 bills signed. 4 I served as Chairman of the PERS Committee for 5 larger than anybody in history. And I'm just saying this 6 because there are a lot of new faces here for me. And I 7 don't have any speech to make or anything. I just wanted 8 to bring your attention to this. It's been handed to you. 9 Harry Markopolos prepared this report. It's 165 10 pages. This is simply a summary. And I would have 11 provided the whole thing, but it would have cost me about 12 $300 to have it copied, so I didn't do that. 13 But in any event, I just wanted to bring it to 14 your attention. I think if you have your professional 15 Investment staff look at it, and analyze it, and then 16 maybe you want to put it on the agenda for a future 17 meeting -- in the near future, I would suggest, because 18 G.E. went down in your portfolio by almost $7 million 19 today. 20 And so, at some point, that turns out to be some 21 real money. In any event, I just would suggest that 22 perhaps this would be a good thing for your staff to 23 analyze and be aware of. And I just think if you -- you 24 might want to get off the railroad tracks before this 25 thing hits, because he's talking about the possibility of
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1 bankruptcy with respect to G.E. 2 And you have a lot of the bonds. Although I 3 couldn't figure out how much you have in bonds. I know 4 it's a lot, because it's pretty much gilded high-grade 5 corporate, so you probably have a lot of it. But that 6 will all -- and it's probably -- when you bought it, it 7 was somewhere above par. And it may not be there now. I 8 couldn't find any quotations on recent quotes on G.E. 9 debt. Although, there are pages and pages of -- or 10 columns and columns of them in the financial things like 11 Barrons. I just didn't happen to have a copy of it to 12 review where they are in relation to par. 13 So I just wanted to just make you aware of this, 14 you know. At least, you know, if anybody asked you about 15 it, the press or whatever, you can see yeah, we're well 16 aware of it, we're analyzing it, and we're keeping an eye 17 on it. 18 And that's basically all you can do. You might 19 want to invite Mr. Markopolos to come out here and defend 20 his report, which I would be -- hell of a public service, 21 because I think in person -- and he's the fellow who outed 22 Madoff. And he wrote a book No One Would Listen. You may 23 have heard of that book. And it took him -- and Harvey 24 Pitt who -- he referred all this stuff to Harvey Pitt who 25 was one of the critics of his report saying, you know, he
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1 could have come to me. Well, it took four years the last 2 time, so maybe we don't want to do it again. 3 That's all I got. I'd be happy to respond to 4 questions if you have any, but thank you. 5 CHAIRPERSON FECKNER: No questions, but we thank 6 you for the information and staff will look at it. So 7 thank you. 8 MR. ELDER: All right. Thank you. 9 CHAIRPERSON FECKNER: So before we close, I just 10 wanted to thank staff for bringing some great speakers to 11 us today for our educational workshop. Very good time. 12 Well spent. And thank you all very much and thank both 13 speakers for some great information. 14 This meeting is going to adjourn. 15 (Thereupon California Public Employees' 16 Retirement System, Investment Committee 17 meeting open session adjourned at 12:12 p.m.) 18 19 20 21 22 23 24 25
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1 C E R T I F I C A T E OF R E P O R T E R 2 I, JAMES F. PETERS, a Certified Shorthand 3 Reporter of the State of California, do hereby certify: 4 That I am a disinterested person herein; that the 5 foregoing California Public Employees' Retirement System, 6 Board of Administration, Investment Committee open session 7 meeting was reported in shorthand by me, James F. Peters, 8 a Certified Shorthand Reporter of the State of California, 9 and was thereafter transcribed, under my direction, by 10 computer-assisted transcription; 11 I further certify that I am not of counsel or 12 attorney for any of the parties to said meeting nor in any 13 way interested in the outcome of said meeting. 14 IN WITNESS WHEREOF, I have hereunto set my hand 15 this 24th day of August, 2019. 16 17 18 19 20 21 22 JAMES F. PETERS, CSR 23 Certified Shorthand Reporter 24 License No. 10063 25
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