(April 16, 2013) — The California Public Employees’ Retirement System (CalPERS) has added derivatives to a list of investment tools permitted in its absolute return allocation, along with the admittance of global macro funds.
The decision was taken at its investment committee meeting yesterday. In an item dedicated to evolving its absolute return strategies, the committee considered a number of changes put forward by consulting firm Wilshire.
Fund managers will now be permitted to use derivatives in their investments, along with leverage and short-selling of securities.
Additionally, the absolute return program’s target risk was recommended to change from one half of the five-year volatility forecast of the CalPERS global equity program benchmark to 8% annualised volatility.
The investment committee received recommendations to include global macro to its permitted list of strategies as the strategic objective of the portfolio changed from: enhancing the system’s long-term return, subject to an appropriate risk budget and providing overall diversification, to: providing diversification to the equity growth risk in the CalPERS overall investment program.
The portfolio will have a targeted equity market beta exposure of 0.2 or less, on average, the meeting documents said.
However, the changes are set to have knock-on effects to the CalPERS overall outlook, Wilshire noted in its letter to the committee chair.
“…we have long supported the idea of shifting the absolute return strategies program to a diversification role, without a public markets overlay, through a dedicated allocation to hedge funds. However…this change will have an impact on the expected return for the total fund, especially if the allocation to absolute return strategies is increased as a result of the ALM process. While we do not believe that this should prevent the investment committee from treating absolute return strategies as a diversifying investment, it should be aware of the implications of doing so,” the letter said.
Elsewhere, the investment committee was asked to consider elongated the period over which its real estate assets were judged. A letter from the portfolio’s consultant, Pension Consulting Alliance, said “current market conditions combined with delayed timing for certain key portfolio transactions means the real estate portfolio is unlikely to meet these shorter-term targets”.
Additionally, the committee agreed that the CalPERS Healthcare Fund should establish its own asset allocation strategy, which should be updated at least every three years.
For all the investment committee documents, click here.