CalPERS Revises Fixed Income and Public Equity Investment Policies

The California Public Employees’ Retirement System (CalPERS) approved a few revisions to its investment policies regarding its public equity and bond portfolios during a recent investment committee meeting.

One key point of the change in policy is a division of the pension’s Global Equity Program between a market capitalization weighted segment and a factor weighted segment.

The primary purpose of the market capitalization weighted segment is to provide the portfolio 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.

Active risk for the segment will be managed using tracking error, or the divergence between actual performance and the portfolio’s benchmark. The pension is forecasting that the tracking error will stay consistent, within the zero to 50 basis points (bps) range, but slight deviations are, of course, “allowed,” depending on current market conditions.

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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, tying returns to economic growth. This, too, will be managed using tracking error, with the same assumptions as the market capitalization weighted segment.

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

The fixed income asset class also broke out into three separate “asset segments” or 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 meant 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.

Interest rate risk of the long Treasury segment will be controlled using duration management, with the duration maintained at +/-10% of the benchmark. Sector risk of the long spread segment will be controlled by sector ranges that specify the degree by which allocations may fluctuate from the benchmark weights.

Also, the new policies will divert reporting of certain violations of investment restrictions and constraints 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

While the COVID-19 pandemic has devastated many sectors of the global economy, it has been a boon for the health care technology sector, which has seen a surge in venture capital (VC) deal-making during the first quarter of the year, according to financial data and information provider Preqin.

Demand for digitally accessible health care products and services has soared as a result of the global lockdown. With huge swaths of the public sheltering in place at home, governments worldwide have been lowering regulatory hurdles that will help increase investor interest in the sector.

Health care technology was already an area of interest to venture capital investors, with $19 billion in deals completed in the sector in 2019, and a record $20 billion in 2018, but the COVID-19 pandemic significantly heightened that interest. Between January and March the total value of global venture-backed health care technology or “health-tech” deals increased 76% compared with the first quarter of 2019 to $8.2 billion. That’s a 25% increase in aggregate deal value compared with the fourth quarter of 2019, and the highest quarterly total on record.

“Remote consultations, prescription delivery, digital therapeutic and wellness classes—demand for next-generation health care solutions has boomed,” Christopher Beales, Preqin’s private equity spokesperson, said in a statement. “Startups and investors are jumping to try and meet that need, and a sector that was already expanding has been given a real shot of adrenaline.”

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Health care technology deal activity has been dominated by North America, which makes up 56% of the total number of deals, followed by Europe, which comprises 21% of all deals, and Asia with 17%.

The largest venture-backed health-tech deal completed during the first quarter was the $285 million series E financing held by ClassPass Inc., a provider of access to fitness classes. The second largest deal during the quarter was the $250 million series D financing for ScriptDash Inc., a San Francisco-based digital pharmacy that trades under the brand name Alto.

“These deals underscore the growing investor appetite for consumer-focused, personalized, digitally accessible health and wellness solutions,” Beales wrote in a blog on Preqin’s website. “Digital technologies such as mobile internet are increasingly being deployed to provide consumers with fast, easy ways to look after their health.”

Deal-making in the sector has continued to rise during the second quarter, with another $3.2 billion in health-tech deals made since the start of April, and Preqin expects a new record for the sector will be set before the year is out. The firm also cites its April survey in which 36% of investors active in alternative assets polled said they are targeting health care-focused investment in 2020 because of COVID-19’s impact.

“This is likely to drive even greater interest in digital health innovations that can offer users on-demand health and wellness services—all at the touch of a button,” Beales said.