(June 18, 2013)–The largest public pension fund in the US has been toying with a risk-factor asset allocation model for three years–and staff members are still pushing for its adoption.
“We believe that using this risk-based model will allow us to make a more transparent portfolio with more stable correlations,” said Senior Portfolio Manager Ben Meng at the California Public Employees’ Retirement System’s (CalPERS) June 17 investment committee meeting.
The model under consideration-custom designed for and by CalPERS-has five factors:
1.) Real interest rate
2.) Realized inflation rate
3.) Expected inflation rate
4.) Volatility
5.) Growth
These five factors together accounted for 84% of the $260.2 billion portfolio’s returns, according to Meng.
“Beyond 2013,” he said, “we would like to continue to work on this approach, and ideally reach the point where we allocate based on this approach, and asset classes like stocks and bonds become the tools by which we implement these risk-factor based allocations.”
The fund’s counterpart for educators–the California Teachers’ Retirement System–has a seven factor model, which is it relatively closer to implementing. The board’s adoption vote was scheduled for June 6, but it was delayed until at least July, due to the absence of several voting members.
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