Podcast Summary: E130: CalPERS CEO Marcie Frost on the Future of the $500 Billion Pension Fund

Podcast Information:

• Title: How I Invest with David Weisburd
• Host: David Weisburd
• Episode: E130: CalPERS CEO Marcie Frost on the Future of the $500 Billion Pension Fund
• Release Date: January 17, 2025

1. Introduction to Marcie Frost and Her Journey to CalPERS

Marcie Frost, the CEO of CalPERS (California Public Employees' Retirement System), shares her remarkable journey from humble beginnings to leading the largest pension fund in the United States.

• Background and Early Career:

  • Quote: "I grew up in a really small rural town in Washington State up on the tip of the Olympic Peninsula..." [01:16]
  • Marcie began working at a young age, transitioning from berry picking with her grandparents to working in a real estate office during high school.
  • Her initial role as a typist in Washington state evolved into a 30-year career, culminating in leadership positions within the state's retirement system and investment board.

• Transition to CalPERS:

  • A headhunter recognized her extensive experience, leading to her appointment as CEO of CalPERS.

2. Organizational Structure and Investment Committee

Understanding the composition and dynamics of CalPERS' investment committee is crucial for effective decision-making.

• Board Composition:

  • Quote: "We have what we call a lay board... are typically more representative of the membership groups." [02:43]
  • CalPERS utilizes a lay board structure, consisting of members elected by the 2.3 million plan members and 800,000 retirees.
  • This structure ensures representation from the broader membership rather than relying solely on investment industry experts.

• Ensuring Quality Decisions:

  • Quote: "We try to find this balance where it's impossible to make everyone happy... as long as we're making everyone equally unhappy, we probably have that balance about right." [03:52]
  • The committee focuses on providing comprehensive education and information to board members to facilitate informed decision-making.

3. Managing Risk and Cultivating a Results-Oriented Culture

Marcie addresses the inherent risk aversion within pension funds and the challenge of balancing headline concerns with actual investment results.

• Risk Aversion Challenges:

  • Quote: "There's a bit of risk aversion because of that headline risk... What if I make a mistake and my name is in print?" [00:16]
  • The prominence of CalPERS often leads to internal caution, driven by the fear of public scrutiny over investment missteps.

• Strategic Asset Allocation (TPA):

  • Quote: "We're trying to get the board to say, here are the risk appetites... turn those limits over to the team to be innovative and creative." [00:55]
  • By establishing clear risk appetites, CalPERS empowers its investment team to operate within defined boundaries, fostering innovation while managing risks.

• Cultivating Trust and Accountability:

  • Quote: "Making sure that the team trusts that this is coming from the board... how does the organization respond to that?" [18:51]
  • Creating an environment where team members feel supported in their decisions, even when outcomes are unfavorable, is pivotal for a results-focused culture.

4. Strategic Asset Allocation and Future Plans

Looking ahead, Marcie outlines CalPERS' strategic priorities and allocation plans for 2025-2029.

• Allocation Focus:

  • Quote: "Private markets, private equity, private debt will be an important part of that." [24:12]
  • CalPERS plans to maintain significant investments in private markets, including private equity and debt, adjusting allocations based on the board's risk appetite statements.

• Reference Portfolio Approach:

  • Transitioning from traditional strategic asset allocation to a total portfolio approach, CalPERS aims to benchmark actual performance against a reference portfolio to enhance accountability and communication.

• Planned Decision Timeline:

  • Quote: "Decision in November of 2025 that will hold for the next four years, along with a two-year interim check-in." [03:52]
  • This structured timeline allows for periodic evaluations and adjustments in response to dynamic market conditions.

5. Stakeholder Engagement and Political Challenges

Balancing diverse stakeholder interests while mitigating political influences is a significant aspect of CalPERS' operations.

• Engaging with Stakeholders:

  • Quote: "We have a whole stakeholder relationship team who we meet with stakeholders every single month." [09:18]
  • Regular interactions ensure transparency and help stakeholders understand the rationale behind investment decisions.

• Managing Political Influences:

  • Quote: "Keeping the politics out of the portfolio so that the team is able to independently look at the commercial aspects of an investment." [09:18]
  • CalPERS strives to shield its investment strategies from political pressures, focusing instead on commercial viability and fiduciary responsibility.

• Handling Media Scrutiny:

  • Quote: "You have to have really thick skin... very strong communication skills." [17:59]
  • Effective communication strategies are essential to navigate media critiques and maintain public trust.

6. Roles and Responsibilities: CEO vs. CIO

Clarifying the distinct roles of the CEO and CIO within CalPERS ensures streamlined decision-making and governance.

• CEO's Role:

  • Quote: "I spend quite a bit of my time thinking about the portfolio... ensuring proper governance over those decisions." [11:02]
  • The CEO oversees the broader organizational strategy, governance, transparency, and supports the CIO in removing operational challenges.

• CIO's Role:

  • Quote: "Stephen's direct role is managing and leading that team, having a vision for the portfolio." [11:02]
  • The CIO focuses on portfolio management, investment strategies, and leading the investment team to execute within the established policies.

7. Transforming Organizational Culture at CalPERS

Marcie emphasizes the importance of cultivating a robust organizational culture to support CalPERS' mission and objectives.

• Initial Assessment and Feedback:

  • Quote: "We could tell that there were these unmet expectations... what is working really well? What at CalPERS do we need to make sure that we preserve?" [14:26]
  • Through conversations, focus groups, and engagement surveys, CalPERS identified key areas for cultural improvement.

• Focus Areas for Cultural Change:

  • Team Engagement: Enhancing employee satisfaction and fostering a supportive work environment.
  • Efficiency and Effectiveness: Streamlining operations to reduce administrative expenses.
  • Transparency: Increasing openness to build trust with members, ranking third in global pension system transparency.
  • Innovation: Revitalizing CalPERS' approach to investment strategies and encouraging employee-driven ideas.

• Implementation and Results:

  • Quote: "We measure those five every year... improved results across all five of those areas." [14:26]
  • Consistent monitoring and measurement have led to significant improvements in team engagement, efficiency, transparency, and innovation.

8. Strategic Goals and Relationships with Managers

Maintaining strong relationships with general partners (GPs) and supporting emerging managers are strategic priorities for CalPERS.

• First Call Partner Goal:

  • Quote: "CalPERS is a first call LP at all times." [27:47]
  • Being a preferred partner ensures that CalPERS remains competitive in securing favorable investment opportunities.

• Supporting Emerging Managers:

  • Quote: "We think we can do a better job at funding some of those emerging managers... significant opportunity for CalPERS." [23:13]
  • By nurturing relationships with emerging and diverse managers, CalPERS aims to foster loyalty and facilitate long-term partnerships.

• Enhancing Decision-Making Speed:

  • Quote: "Making sure that the markets know that CalPERS is in right, we're open, we have liquidity... making those decisions timely." [27:47]
  • Streamlining decision processes ensures that opportunities are not missed due to delays in commitment.

9. Lessons Learned and Final Thoughts

Reflecting on her tenure, Marcie shares valuable insights and aspirations for CalPERS' future.

• Key Lessons:

  • Quote: "I wish I would have spent a little more time early on understanding [stakeholders]... and focusing on the investment office." [29:50]
  • Understanding stakeholder dynamics and stabilizing the investment office are critical for sustained success.

• Commitment to the Mission:

  • Quote: "CalPERS is in this really fun... servicing those members so that they make the best choices around their retirement." [31:31]
  • The core mission remains focused on ensuring financial security and dignity for the 2.3 million public sector workers relying on CalPERS.

• Future Aspirations:

  • Quote: "I feel very strongly that every US Worker should have access to a defined benefit plan just to have that safety net." [32:23]
  • Advocating for broader access to defined benefit plans underscores CalPERS' commitment to enhancing retirement security nationwide.

Conclusion: In this episode, Marcie Frost provides an in-depth look into the strategies, challenges, and cultural transformations at CalPERS. Her leadership focuses on balancing risk, fostering innovation, enhancing stakeholder relationships, and ensuring that the pension fund remains robust and responsive to the needs of its members. For those interested in institutional investment management and pension fund operations, Marcie's insights offer valuable lessons on governance, strategic planning, and organizational culture.