California Pension Fund Hopes Riskier Bets Will Restore Its Health

“The fun part is the investment part,” Mr. Dear added, speaking in fast, yet measured tones. “The necessary part is the organization, the management and the work in the political environment. The common element in my career is that I’m extremely focused on improving the performance of the organizations I work for.”

Mr. Dear, 57, is also chairman of the Council of Institutional Investors, a Washington nonprofit group that promotes shareholder activism — an effort close to the heart of the Calpers’s board and one reason he was hired.

“The board felt that we had extremely good depth on the investment staff,” said George Diehr, chairman of the board’s investment committee. “We were looking for someone to knock down silos and get various asset managers talking to each other. We felt Joe would have those skills. He’s well known in the public pension field, and he’s a strong advocate for corporate governance.”

In the end, Mr. Dear, who will get $408,000 to $612,000 in salary and can qualify for a performance bonus of up to 75 percent of that salary, will be judged by portfolio returns.

Already, Calpers has raised its target for private equity and related investments by 40 percent to about 14 percent of the total portfolio. To cover any calls by private equity firms for additional money, the fund has also raised its target for cash on hand to 2 percent of assets.

It is ratcheting back on public domestic stocks, which account for less than 25 percent of the portfolio, while another 25 percent of the portfolio is in international equities.

Critics say that Mr. Dear and Calpers — which has a staff of 200 investment professionals — are taking on too much risk.

“Calpers is significantly underfunded, and they have decided that they will roll the dice,” said Edward A. H. Siedle, president of Benchmark Financial Services, which audits pension plans. “Is that appropriate if you have just lost 25 percent of your portfolio? These are high-risk, illiquid, unregistered products where there is tremendous valuation uncertainty. I would bet you any amount that five years from now, this plan will not have outperformed the market.”

Mr. Dear says he can improve performance in other ways as well. He has pressed the private equity and hedge funds in Calpers’s portfolio to reduce their fees, provide more transparency and segregate Calpers’s money from that of other investors. While not ready to announce any agreements, Mr. Dear said he was making “good progress.”

Last week, he testified before Congress that private equity and hedge funds should register with the Securities and Exchange Commission and be subject to the agency’s oversight. On the activist front, Calpers has voted against management in a number of recent proxy battles, including management of Bank of America. And Mr. Dear or his staff meet regularly with members of Congress and the Obama administration.

Saying he spends a third of his time as investment chief, a third on board matters and a third on outside issues, Mr. Dear remains passionate that this is the moment when shareholders can prevail.

As he sees it, “You have public awareness, outrage over the consequences of a failed regulatory system and an administration and Congress prepared to respond.”