The CalPERS Effect Is Weakening

August 17, 2005 ( - The California Public Employees Retirement System's (CalPERS') plan to focus its attention on "laggard" stocks is producing smaller returns for the fund than it once did.

According to the Sacramento Bee, a Wilshire Associates study found the fund’s Focus List of investments has seen a gain of only 15.3% in stock value over a five-year period which is a huge drop from its five-year gain of 54% reported in 1995.

Annually, CalPERS creates a Focus List of investments made up of stock from companies with poor earnings, sagging stock price, and weak governance practices such as excessive executive pay, the newspaper reports.   Stock prices for these companies usually increase from 1% to 40% over a number of years after being placed on the list, a result know as the CalPERS effect.

Counter Points

But some scholars disagree, saying many targeted companies would have rebounded without CalPERS’ involvement.   “The overwhelming evidence indicates … there’s no measurable positive impact from traditional shareholder activism,” said Jonathan Karpoff, a finance professor at the University of Washington who has studied the CalPERS effect, told the Sacramento Bee. “They don’t appear to have a lot of benefit.”   Karpoff said past Wilshire reports and other similar studies have had benchmarking flaws, making it difficult to compare performance of the target companies with other underperformers.

The Bee notes that the CalPERS focus list 2005 gain was skewed by large run-ups by “a very few select companies.” In fact, 61% of companies were underperforming after five years, according to the report.

Wilshire believes the CalPERS effect could be weakening because CalPERS was less aggressive with its governance campaign in the late ’90s, and the bear market drove investors to more blue chip-type stocks, the Sacramento Bee reports.   But, CalPERS trustees still support the program, believing it is an effective tool for the investment portfolio.

CalPERS Effects

CalPERS’ website notes that a Wilshire Associates study examined the performance of 113 companies targeted by CalPERS between 1987 to 2003. Results indicated that while the stock of these companies trailed the Standard & Poor’s 500 Index by 97.7% in the 5-year period before CalPERS acted, the same stocks outperformed the index by 8.1% in the following five years.

Furthermore, a study performed by CalPERS CIO Mark Anson, Ted White, Portfolio Manager, and Ho Ho, Quantitative Equity Portfolio Manager found that CalPERS Focus List has added shareholder wealth to targeted corporations.   CalPERS claims that inclusion in the list is associated with an additional return to shareholders of about 12% on average over the three months after release of the List, and that the period 95-184 days after publication is associated with additional cumulative excess return of 5.37%.

The focus list is online at