WEBVTT - CalPERS CEO Marcie Frost Talks Exxon Mobil Campaign

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's talk about a person who is driving markets all

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<v Speaker 2>the time. Marcy Frost joins us, the CEO of CalPERS,

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<v Speaker 2>one of the largest equity holders in the country, in

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<v Speaker 2>the world.

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<v Speaker 3>Marshy, thanks so much for joining us.

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<v Speaker 2>I want to start with just a breakdown of how

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<v Speaker 2>much you hold and where you're putting it. I think

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<v Speaker 2>it's something like one hundred and sixty billion dollars in

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<v Speaker 2>stocks and the majority the lion shares here in North America.

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<v Speaker 3>Do you think about diversifying.

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<v Speaker 2>Out as other regions grow Europe, Asia, Africa, or because

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<v Speaker 2>you represent you know, workers in America, do you want

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<v Speaker 2>to invest the mass of your money here.

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<v Speaker 4>So we are a five hundred billion dollar portfolio and

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<v Speaker 4>just under fifty percent of that is allocated to global equity.

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<v Speaker 4>So we have really taken more of this tilt to

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<v Speaker 4>follow where we think capital formation will occur, and some

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<v Speaker 4>of that tilt has moved us more globally than domestically.

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<v Speaker 2>So what about in terms of tech investment, because you

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<v Speaker 2>have a massive chunk there and you've boosted I think

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<v Speaker 2>your allocation to ship stocks like Nvidia, which have done

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<v Speaker 2>really well. Does that continue to grow the portion of

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<v Speaker 2>big tech stocks in your portfolio, or do you start

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<v Speaker 2>to take profits.

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<v Speaker 4>Yeah, So most of the global equity portfolio is really

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<v Speaker 4>done through index funds, So we're holding those companies at

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<v Speaker 4>the weighting and the index based on the allocation. Where

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<v Speaker 4>we see more direct investing or direct opportunities will be

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<v Speaker 4>more on the private assets and how we're deploying capital

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<v Speaker 4>to venture capital, whether that's a climate technology play, whether

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<v Speaker 4>that is a climate transition play. But on the public

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<v Speaker 4>equity side, for the most part, we are just holding

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<v Speaker 4>the weight of that company in the portfolio.

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<v Speaker 2>In terms of the private market investments, how big how

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<v Speaker 2>big of an action is that, because these investments can

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<v Speaker 2>be fairly opaque, right.

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<v Speaker 3>I think Chris Ayleman from.

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<v Speaker 2>Cal Stirs has said it's like a moving bulls eye

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<v Speaker 2>and you don't know until three years later after you've

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<v Speaker 2>hit it.

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<v Speaker 4>Plus they're very expensive, right, So we have we just

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<v Speaker 4>moved our allocation target to both private equity and private debt.

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<v Speaker 4>We increase those just back in November, So we're moving

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<v Speaker 4>from a thirteen percent private equity allocation, moving that up

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<v Speaker 4>by four and then also increasing our private debt. So

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<v Speaker 4>there is a bit of opaqueness in private equity. These

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<v Speaker 4>are private companies portfolio companies, but it's not really opaque

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<v Speaker 4>to the investor. We can have the same interactions with

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<v Speaker 4>a GP and a portfolio company that we can have

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<v Speaker 4>with a public company. So even though the returns on

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<v Speaker 4>those have been a little slower to capital to be

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<v Speaker 4>returned to CalPERS, we still have a lot of conviction

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<v Speaker 4>in the private markets, private debt in particular, and also

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<v Speaker 4>private equity as we've changed really the way that we've

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<v Speaker 4>implemented private equity. We have a long history of really

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<v Speaker 4>investing in the large megafunds, the buy up funds, the

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<v Speaker 4>fund of funds. We are now with this increased allocation,

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<v Speaker 4>moving more that into the co investment space, which does

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<v Speaker 4>not have that feed drag that you mentioned.

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<v Speaker 2>But you're increasing your allocation in part because you've done

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<v Speaker 2>so well with those investments in the past. What kind

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<v Speaker 2>of returns do you expect from private equity and private credit, so.

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<v Speaker 4>On the private equities part of the portfolio, it's one

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<v Speaker 4>hundred and fifty bits above what we would get out

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<v Speaker 4>of regular passive strategy and public equity. Private debt is

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<v Speaker 4>something that we have a little more connection with and

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<v Speaker 4>that's ranging somewhere in the seven to ten just depending

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<v Speaker 4>on market cycle.

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<v Speaker 3>What about the costs, I mean, we always hear about.

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<v Speaker 2>The costs for capital and then the profit sharing costs.

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<v Speaker 2>Two and twenty is the famous number that the retail

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<v Speaker 2>investor may get. But you're obviously a much bigger presence.

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<v Speaker 2>Do you have the way to negotiate down those costs?

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<v Speaker 4>We do have theity to negotiate costs. It a little

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<v Speaker 4>bit differently than maybe some of our smaller counterparts. But

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<v Speaker 4>I think what is more important in the strategy as

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<v Speaker 4>it sits today is the co investments, and we're able to,

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<v Speaker 4>you know, really pick the managers we want to do

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<v Speaker 4>business with and then sit alongside them on a co

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<v Speaker 4>investment deal. We spend a lot more time on manager

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<v Speaker 4>selection than we do thinking about what a portfolio company

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<v Speaker 4>or a sector might be. That conviction with a manager

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<v Speaker 4>is really where we're spending our time.

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<v Speaker 3>What are you looking for as a manager.

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<v Speaker 4>So we want someone who has you know, has a

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<v Speaker 4>track record. We want to work with someone who is

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<v Speaker 4>transparent with us around how those portfolio companies are being managed.

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<v Speaker 4>We just instituted labor principles across the portfolio, and in particular,

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<v Speaker 4>we want to see how our private equity managers will

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<v Speaker 4>attest and make sure that you know, workers have freedom

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<v Speaker 4>of association, that workers have rights to safety, that workers

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<v Speaker 4>have benefits that would be commensurate for the type of

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<v Speaker 4>work that they're doing, but that they have a safe

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<v Speaker 4>and healthy workplace. So those labor principles just came in.

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<v Speaker 4>We're having our GPS our general partners sign on that

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<v Speaker 4>they attest to largely abide by these principles, and then

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<v Speaker 4>any new deal would have to be signed on to

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<v Speaker 4>as well. So we're looking for companies who had value

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<v Speaker 4>alignment with us, want to do value creation of the

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<v Speaker 4>long term and understand that we're a public pension fund

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<v Speaker 4>and there are certain things at a public pension fund

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<v Speaker 4>based on us representing workers public sector workers that maybe

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<v Speaker 4>private equity of the past twenty years ago, though some

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<v Speaker 4>of those practices have had to change over the decades,

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<v Speaker 4>and I think the gps have been doing a great

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<v Speaker 4>job there, but we want to make sure that there's

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<v Speaker 4>value alignment.

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<v Speaker 2>I imagine it's even more important to get what you

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<v Speaker 2>want in terms of choosing a chief investment officer. You've

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<v Speaker 2>just named Steven Gilmour of New Zealand Fund as your

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<v Speaker 2>next CIO.

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<v Speaker 3>How difficult was that?

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<v Speaker 2>I know Cawsters also is looking for a new CIO

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<v Speaker 2>right and it must be a very competitive space.

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<v Speaker 1>It is a very competitive space.

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<v Speaker 4>And when you're thinking about the scale and the public

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<v Speaker 4>nature of CalPERS, you find yourself in this place where

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<v Speaker 4>there aren't a lot of truly qualified individuals who one

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<v Speaker 4>had the background to do it, but two really have that,

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<v Speaker 4>you know, resilient nature to work in a public fund

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<v Speaker 4>like CalPERS. Calstro's just announced recently that their deputy CIO

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<v Speaker 4>came into the CIO role, and that's Scott Chan and

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<v Speaker 4>we have a great relationship with Scott and so Stephen

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<v Speaker 4>will come in. He is coming in from New Zealand.

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<v Speaker 4>He starts on July fifteenth, till start at our board's

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<v Speaker 4>off site. It's a great opportunity for him to understand

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<v Speaker 4>all of the strategies. He's been already interacting with my

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<v Speaker 4>team with me and we're thrilled to have him.

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<v Speaker 2>Do you have I mean I know that you know

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<v Speaker 2>ESGDI is still very important to you, as is evidenced

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<v Speaker 2>by at least in one instance, your.

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<v Speaker 3>Fight against Exxon. We're going to talk about that in

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<v Speaker 3>a second.

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<v Speaker 2>Did you feel more pressure to pick a more diverse

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<v Speaker 2>candidate for CIO?

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<v Speaker 4>We don't feel that pressure. We want to make sure

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<v Speaker 4>that when we are recruiting for any position at CalPERS,

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<v Speaker 4>that we've reached out to a wide variety of our

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<v Speaker 4>networks and so for us our workforce, the way that

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<v Speaker 4>we measure whether we are doing DEI appropriately is that

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<v Speaker 4>our workforce, the managers who we work with, really need

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<v Speaker 4>to be reflective of the population of the state of California.

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<v Speaker 4>So that diversity is really important. That as you're out recruiting,

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<v Speaker 4>people want to know that they have that ability to

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<v Speaker 4>promote within a system like CalPERS.

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<v Speaker 1>So we cast a wide net, but what it.

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<v Speaker 4>Comes down to is finding the most qualified individual and

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<v Speaker 4>that is what we found in mister Gilmore.

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<v Speaker 2>Calper's CEO, Marci Frost, is still with us and she

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<v Speaker 2>owns stakes in some of these major oil I would

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<v Speaker 2>venture to say probably most of the major oil producers.

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<v Speaker 2>One of them, Marcy is Exon, and there has been

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<v Speaker 2>a pretty heated fight over some shareholder proposals. Darren Woods

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<v Speaker 2>and Exon have sued a couple of shareholders for proposals,

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<v Speaker 2>they backed down, and yet Exon continued on with its

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<v Speaker 2>lawsuit to try and what stop what it sees as

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<v Speaker 2>superfluous proposals being pushed through at agms. You are now

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<v Speaker 2>going to vote against all twelve directors on the board

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<v Speaker 2>at the AGM tomorrow and the CEO Darren Woods.

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<v Speaker 3>What's happening here?

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<v Speaker 4>Well, we believe that it's one first and foremost, it's

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<v Speaker 4>an absolute governance failure by the Exon board, which is

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<v Speaker 4>why our vote is against the entire board, including the CEO,

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<v Speaker 4>Darren Woods. After much interaction with the company itself, including

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<v Speaker 4>with my investor relations team, a direct conversation that I

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<v Speaker 4>had with mister Woods a couple of weeks ago. He

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<v Speaker 4>heard me out, I heard him out. It was a

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<v Speaker 4>very thorough discussion. But that the end of that discussion,

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<v Speaker 4>it was obvious we were not going to reach agreement.

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<v Speaker 1>On this litigation.

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<v Speaker 4>I actually made a request that they withdraw it. So

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<v Speaker 4>a couple of facts I think that are really important

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<v Speaker 4>here is that the proposal at issue was a proposal

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<v Speaker 4>in twenty twenty three that got ten and a half

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<v Speaker 4>percent of shareholder approval ten and a half percent. That's

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<v Speaker 4>the issue they're dealing with, beyond the fact that these

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<v Speaker 4>are non binding proposals, beyond the fact that they did

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<v Speaker 4>not go through the sec relief process, the no action process,

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<v Speaker 4>and went directly to the court. And so what I

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<v Speaker 4>think is happening is that they are trying to redefine

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<v Speaker 4>ordinary business to limit proposals coming from owners of that

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<v Speaker 4>company around issues related to climate potentially. But I think

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<v Speaker 4>it is far more implications than just climate. I think

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<v Speaker 4>it could be, say, on pay, I think it could

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<v Speaker 4>be independence of board governors or governance. I think this

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<v Speaker 4>could be a very risky lawsuit to continue with.

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<v Speaker 1>If you're an owner.

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<v Speaker 2>Now, you only hold I think zero point two percent

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<v Speaker 2>of x ON stock, but obviously you have gigantic name recognition,

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<v Speaker 2>and I'm sure you talk with a lot of other

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<v Speaker 2>large shareholders. How much sway do you think you're going

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<v Speaker 2>to have with this opposition tomorrow.

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<v Speaker 4>So we hold about a billion dollars worth of stock

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<v Speaker 4>and bombs in our portfolio, so it is a material

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<v Speaker 4>holding in the portfolio itself. But I think there are

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<v Speaker 4>longer term implications that if we start saying we're going

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<v Speaker 4>to restructure or redefine ordinary business than any topic that

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<v Speaker 4>a company doesn't want to discuss with its owners becomes

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<v Speaker 4>on the table. So I think what we've seen since

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<v Speaker 4>we've come out and said how unhappy we are about

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<v Speaker 4>this litigation proceeding. You've seen other funds come in. You've

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<v Speaker 4>seen New York, You've seen Calsters, you've seen Norges, the

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<v Speaker 4>Sovereign Wealth Fund, you've seen Glass Lewis, which is a

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<v Speaker 4>proxy voting service provided to other smaller institutions, all coming

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<v Speaker 4>out with the same concern about the litigation. Now the

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<v Speaker 4>approach is a bit different. How they want to vote

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<v Speaker 4>those shares is a bit different. I believe so far

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<v Speaker 4>today we're the only ones who say, because this is

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<v Speaker 4>a governance failure, we're voting against the whole slate of directors,

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<v Speaker 4>including the three that we voted in on the Engine

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<v Speaker 4>one one.

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<v Speaker 3>Yeah.

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<v Speaker 2>In terms of I mean G is, I think the

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<v Speaker 2>oft forgotten letter in the acronym EESG. Right, it's obviously

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<v Speaker 2>important to you, the E and the S, also environment

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<v Speaker 2>and social. How much do you lean into this amidst

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<v Speaker 2>the backlash that we've seen over the past couple of years,

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<v Speaker 2>especially some red states, even through legislation, are pushing back

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<v Speaker 2>against ESG investing.

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<v Speaker 4>Yeah, Unfortunately, I think it's become this red state blue

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<v Speaker 4>state issue.

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<v Speaker 1>It's not.

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<v Speaker 4>We've never looked at it in that manner. We've always

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<v Speaker 4>looked at this the last twenty years about risk and

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<v Speaker 4>return that we're investing over twenty thirty forty year time horizons.

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<v Speaker 4>Our liabilities, our pension payments are long dated, so the

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<v Speaker 4>risks that are being identified today are going to be

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<v Speaker 4>very different than the risks that we see at a

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<v Speaker 4>macro or micro level happening over time.

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<v Speaker 1>So ESG.

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<v Speaker 4>However you want to define it, I think there are

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<v Speaker 4>many definitions out there. We really talk about it with

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<v Speaker 4>climate and workers and governance of these boards and so

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<v Speaker 4>we just announced our Sustainable Investing twenty thirty plan and

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<v Speaker 4>it has the components on energy transition as well as

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<v Speaker 4>putting more money into diverse managers, diversifying the manager set

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<v Speaker 4>by which we're allocating capital to start really having the

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<v Speaker 4>financial markets recognizing the power of diversity, the innovation of

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<v Speaker 4>diverse managers equally to the managers who've had traditional access

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<v Speaker 4>to this capital.

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<v Speaker 1>And we believe that those are fiduciary issues.

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<v Speaker 3>And you can do this.

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<v Speaker 2>I mean, you're raising your allocation to private market investments,

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<v Speaker 2>Can you continue to have that much impact there as

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<v Speaker 2>you can in public markets?

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<v Speaker 1>We can, we can.

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<v Speaker 4>I think the fact that we're moving out of many

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<v Speaker 4>of those mega buyout funds and the big fund of

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<v Speaker 4>funds that we're able to go down in that mid

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<v Speaker 4>market space and we see much more diversification in that

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<v Speaker 4>mid market space. And we've actually deployed about four billion

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<v Speaker 4>dollars of ten billion in commitments to diverse managers.

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<v Speaker 3>Marcy, great having you with us, Hope you can come back.

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<v Speaker 2>Marci Frost, the CEO of Counphers, talking to us about

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<v Speaker 2>the investments they're making on behalf of workers in America