CalPERS, Just Missing Target, Broadens Its Investment Strategies

The California Public Employees’ Retirement System (CalPERS) recently re-tooled its investment policies to enhance liquidity and diversify its investment approach. This move comes after falling short of its target for the recent fiscal year.

During a recent investment committee meeting, the committee decided to divide the pension program’s Global Equity Program between a “Market Capitalization Weighted Segment” and a “Factor Weighted Segment.” The market cap approach, which tilts more heavily toward larger stocks, and the factor method, which rests on assessments of such conditions as dividend payouts and stock quality in equity selection, would give CalPERS a broader range of strategies.

The strategy reshuffle comes amid slightly lower investment returns for the giant fund: It generated 6.7% in the 2018-19 fiscal year, ending June 30, falling just shy of its 7% investment goal. This is compared to 8.6% the year before, and 11.2% in 2016-2017. CalPERS’s funded status is 70%.

The primary purpose of the market capitalization-weighted segment is to provide the portfolio with an outlet for high beta, and returns correlated with economic growth while at the same time being a source of liquidity for the $354 billion portfolio.

Measuring risk on the market cap segment will be keyed to tracking error, or the divergence between actual performance and the portfolio’s benchmark. The pension is forecasting that the tracking error will stay consistent with the zero to 50 basis points range, but slight deviations are “allowed,” depending on current market conditions.

The factor weighted segment, on the other hand, is intended to have reduced volatility characteristics and some diversification of equity risk, while acting as a high source of beta as well. This, too, will be managed using tracking error.

Both segments of the global equity program are expected to help keep a tight maintenance on portfolio volatility.

The fixed income asset class also broke out into three separate strategies, each with their own strategic objectives: long Treasury, long spread, and high-yield.

The long Treasury segment is intended to serve as an economic diversifier to equity risk and be a reliable source of liquidity, while the long spread is to provide a reliable source of income and an additional source of liquidity. The high-yield segment is intended to provide exposure to economic growth and act as a reliable source of income, given its larger interest income.

Also, the new policies will shift reporting of certain internal rules violations from the pension’s board to the pension’s senior investment staff.

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Tags: California, CalPERS, Fixed-Income, Global Equity, investment policy

When Janet Yellen chaired the Federal Reserve, she was known for her careful views that sought never to antagonize anyone. No longer. Her latest outspokenness was on view at the World Business Forum, where she said the risk of a recession is mounting.

In mid-2017, right before leaving office, she raised eyebrows by saying that no economic crisis would occur “in our lifetime.” She reasoned that, unlike the situation that led to the 2008 meltdown, banks had become more cautious about lending.

But this past week she declared she’d found “good reason to worry” about the US tumbling into another recession. While she didn’t see such a downturn imminently, she stated that the risks were mounting.

“I would bet that there would not be a recession in the coming year. But I would have to say that the odds of a recession are higher than normal and at a level that frankly I am not comfortable with,” she said.

One reason Yellen cited was the US-China trade war, harming Americans with higher prices due to tariffs and an overall sense of uneasiness. Plus, the Fed’s three recent rate cuts meant that the central bank now has less ammo to fight a recession, said Yellen, who started hiking rates in late 2015, after keeping them near zero like her predecessor, Ben Bernanke.

Now, she said, her successor had “not as much scope as I would like to see for the Fed to be able to respond to that. So, there is good reason to worry.” Similarly, she lamented the large federal deficits during a period of prosperity, which also would hinder fiscal policy to combat a slump.

She also found it worrisome that US corporations had packed on a lot of debt owing to low interest rates, which threatened to hurt them once the economy chilled. “If there is a recession, there will be a lot of companies that will be in trouble because of all the debt they’ve piled on,” Yellen said.

Yellen, a Democrat, pointed to income inequality as a malign force in society. “It’s a serious economic problem and social problem because it means the gains of our economic system are not being widely shared,” she contended.

Last winter, Yellen abandoned her previous stance of not criticizing Donald Trump when she said he had had no “grasp of economic policy.” She indicated that she doubted the president knew what the Fed was supposed to do.

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Tags: Federal Reserve, Janet Yellen, rate hikes, recession