CalPERS Fund Details Billions in Real Estate Losses

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In 2004, faced with a "flood of capital" into real estate markets, the directors of the CalPERS investment fund, one of the largest pension funds in the country, made a fateful decision.

With yields plummeting, CalPERS sold off $16 billion of core assets and decided to shift $30 billion of the portfolio into "higher risk" real estate. At the same time, the fund, which represents California public employees, moved toward "a less formal authorization process," giving staff less control of the risky investments, according to a new report.

Needless to say, the new strategy didn't go well.

After buying into the market as it peaked in 2005 and 2006, CalPERS was uniquely positioned to take a beating when the market collapsed. By Sept. 2009, the fund's commercial real estate portfolio had lost 48.8 percent of its value from a year earlier, according to a review of the fund's strategy.

Beyond simply buying into risky projects at the height of the market, CalPERS made some fundamental errors in gambling away its members' pension funds, notes a gentle study by Pension Consulting Alliance. Problems included increased leverage; concentrated investments in sub-markets, which increased the fund's risk; and an "increase in the number of manager relationships and commingled investment vehicles," the report says.

As detailed by former San Diego Union-Tribune reporter Ed Mendel in his Calpensions column, CalPERS made several massive, bonehead investments, including:

• Paying $970 million in Jan. 2007 for a majority stake in Lennar Corp., which was developing 15,000 acres near Los Angeles. The project went belly up 15 months later.

•   A $500 million investment in a failed plan to build apartments on 80 acres in New York City.

•  In 2005 the fund paid $3.1 billion to acquire Centerpoint, a Chicago company. One analyst estimated the fund overpaid by $900 million, even before the value of the company plummeted.

•  The fund invested $91 million in a controversial plan to build condos, hotel rooms and stores over the Massachusetts turnpike in Boston. The project was never built.

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