Ahead of Asset Allocation Vote, CalPERS Bends Toward Simplicity

This week, the CalPERS investment committee will vote for one of four candidate portfolios that could change the pension’s asset allocations strategy for the next four years.

As CIO has previously reported, CalPERS is considering significant changes to its asset allocation strategy that could double investments in fixed-income or add significant risk to the overall investment strategy, by adding equities exposure. Required contributions from constituent cities and organizations could also rise considerably.

One of the options under consideration would essentially keep CalPERS investment portfolio as-is, and a consensus is emerging that the status quo is the way to go. During the pension’s November meeting, the vast majority of public comment from CalPERS constituents argued for keeping the current investment targets and contribution requirements. That position seems to be largely supported by the investment staff. In a memo released with the agenda items for the investment committee meeting on December 18, the committee recommends Candidate Portfolio C, which most closely resembles CalPERS current allocation mix.

In the memo, the investment office notes that Portfolio C maintains the current return mandate of 7% and will keep contribution expectations manageable for CalPERS constituents. Portfolio C also maintains the pension’s exposure to global equities, which are forecast to do well in 2018.

CalPERS consultants Meketa, Pension Consultants Alliance, and Wilshire Associates also all sent opinion letters in voicing support for Portfolio C, citing more favorable market forecasts.

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Portfolio C would also maintain the pension’s current portfolio allocation of 8% to private equity. CalPERS is said to be considering a deal with BlackRock to have the world’s largest asset manager take over CalPERS $26 billion private equity program. The BlackRock relationship is one of several options on the table to revamp how CalPERS invests in private equity.

A few years ago, the pension opted to make bigger allocations to fewer managers, but as CIO reported in November, questions have emerged about whether the pension traded away diversification and performance for limited cost cuts. The pension is considering splitting up that 8% among more managers going forward.

$344 billion CalPERS reported an 11.2% net investment gain and an increase of more than $24 billion in assets for the fiscal year ending June 30, 2017, according to its most recent performance report.

Tags: Board Meeting, CalPERS, Pension

In an interview with Bloomberg, Hiromichi Mizuno, CIO of Japan’s $1.37 trillion Government Pension Investment Fund (GPIF), expressed his thoughts on the future of technology and ESG investing. While some of his insights were those CIOs could agree with, the timeframe may surprise them.

When asked about changes he expects in the next five to 10 years, Mizuno expects the “adoption of technology, including [artificial intelligence (AI)] and ESG integration into all asset classes.” He also believes AI could either “replace or enhance the asset managers’ work, particularly for short-term trading.”

“Asset managers have to adjust their conventional business model. Investors will be more focused on the long-term investment theme, as AI will take over the short-term trading,” he said of the implications of his prediction coming true. “In other words, investors will shift their focus to the long-term sustainability of their portfolio, and more focus on their investment themes like ESG.”

While he does see a lot of jobs being cut as another implication, Mizuno also thinks it will open other opportunities for new roles.

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“I think the long-term thinking and the ESG-like non-numerical, non-quantitative information will continue to require human interpretation. I believe AI will release the human resource to do something else,” he said.

Mizuno also noted that AI and human intelligence working together was the best opportunity overlooked by the industry, as asset managers are utilizing AI to simply replace their analysts rather than collaborate. He said this issue was the driving factor of GPIF’s recent Sony Computer Science research partnership. The agreement sees GPIF and Sony Computer Science Laboratories study the impacts of AI on asset management to discover possibilities on how to utilize AI technologies for the fund’s long-term asset management.

“We are trying to be ahead of the curve,” he said. “When the asset management industry starts adopting that, we just want to be there to understand what’s happening.”

As for the future of ESG-themed investing, Mizuno sees it becoming irrelevant as the market begins using it for pricing in their investments.

In addition, Mizuno expressed that he wouldn’t be surprised if Google and Amazon were to become asset managers at some point due to their AI technology and data collection.

“I won’t be surprised if Google and Amazon become asset managers, but I think a lot of people in this industry will be,” he said. “I take it for almost granted that they will come into this market because they have cutting-edge AI technology and they now capture all the big data of what’s happening in the market.”

Tags: Artificial Intelligence, ESG, GPIF, Hiromichi Mizuno, Pension