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Calpers working on new stock-trading model

The nation’s largest public pension fund, which has suffered sharp losses in its investment portfolio during the past year, is developing a new stock trading system that potentially reduces the numbers of brokers who get commissions.

The $181 billion California Public Employees’ Retirement System said this week that it has released a broker questionnaire as the “first step toward the deployment of a new stock trading model.”

The new methodology eventually will apply to all trading of internally managed strategies for U.S. and international equities.
“This model will help us consolidate our broker lineup and clarify performance objectives,” said George Diehr, Chair of the CalPERS Investment Committee. “While we’ve had very good results in our trades, we now have the tools to improve our process and keep pace with an increasingly complex market.”

CalPERS said the number of its potential trading partners has increased in recent years but the declining per share commission charge has fallen, making it more difficult for emerging brokers to compete for pension fund business.

During the past year, CalPERS and Mosaic Investment Advisors have developed a self-administered questionnaire to measure three elements critical to effective broker relationships.

The questionnaire evaluates current brokers in terms of their track records and, in the case of new, established or emerging brokers, their prices for executing stock trades versus the target price, net of their commission; their operational ability to receive, process, and settle trades in a robust and efficient manner; and the “value-added” ways that brokers can help CalPERS staff manage the Global Equity portfolio.

“Our merit-based trading model, coupled with aid from our diversity consultant, will help us evaluate brokers, become more selective in those we use, and identify minority-, woman-, or disabled-owned firms that otherwise might be overlooked,” said Anne Stausboll, CalPERS Interim Chief Investment Officer.

CalPERS and Mosaic Investment Advisors surveyed 130 brokers in January 2008 and scored the 67 responses received, based on execution quality, operational capability, and value-added. Brokers are being placed in three pools – “core” for the high scorers, “developmental” for brokers who would be given opportunity to demonstrate their capabilities for advancement, and a “queue” group to be given opportunity to move to the developmental pool.

CalPERS is the nation’s largest public pension fund with approximately $180 billion in assets. It manages more than 70 percent of its public stock investments internally.

The pension fund provides retirement and health benefits for more than 1.6 million state and public agency employees, retirees, and family members. For more on CalPERS, visit www.calpers.ca.gov.


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