CalPERS Restructures Infrastructure Guidelines

Pension officials hope more flexibility to invest in international infrastructure projects in developed countries will give the program more diversification and help results.

The California Public Employees’ Retirement System (CalPERS) investment committee has approved a restructuring of the plan’s infrastructure investments portfolio guidelines to allow for more investments in overseas projects in efforts to expand the program and boost already strong returns.

The $4.4 billion infrastructure program makes up just 1.3% of CalPERS’s overall $245.6 billion portfolio, but its investment results stand out.

The infrastructure portfolio returned 17.3% net for the one-year period ended Oct.31, 12.8% for the three-year period, 14.7% for the five-year period, and 15% for the 10-year period. (CalPERS 12-month fiscal results for the period ending June 30, 2018, showed infrastructure returns were even higher at 20.6%.)

The restructuring allows CalPERS to invest up to 60% of infrastructure investments in international developed countries, up from the current 50%, and decreases the minimum amount that can be invested in US projects to 40% of the infrastructure portfolio from 50%.

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The CalPERS infrastructure portfolio is currently made up of 55% US investments and 45% overseas.

International infrastructure assets in developed markets have had particularly strong returns for CalPERS, particularly core international investments, which posted a 41% return for the 12-month fiscal year ending June 30, shows a report by the Meketa Investment Group, the system’s infrastructure consultant.

The September report said that CalPERS had a 29% infrastructure allocation to core international assets.

Meketa said the international core assets were “a key component of Core’s impressive returns” overall, including the US. The core assets produced a 25% return for the fiscal year-ending June 30.

Paul Mouchakkaa, CalPERS’s managing investment director for real assets, played up diversification

in explaining the infrastructure guideline changes at an investment committee meeting on Dec. 17.

“There’s a significant portion of US deals that come in the power and energy space,” he said. “And in order for us to achieve better diversification, we believe this is a measured and thorough approach to allow us to have a broader exposure across different sectors in the infrastructure landscape,” he said.

Mouchakkaa said the infrastructure guidelines change also gives CalPERS “more flexibility

to scale the infrastructure portfolio so that we’re not boxed in focusing only on one geography.”

CalPERS Board President Priva Mathur told fellow investment committee members that she felt the guidelines change was prudent and would not increase investment risk.

“I think this is a sensible and prudent response to the structure of the markets,” she said. “We were hoping that with this current administration’s focus on infrastructure, we would see more deal flow here in the US in the space that we would find attractive,” she said.

A key proposed initiative of President Trump was funding $1.5 trillion in US infrastructure projects but the plan never got off the ground because there was no agreement in Congress on how it could be funded.

Because of strong returns, competition among institutional investors has been intense for investing in infrastructure assets. CalPERS would like to have at least 2% of its assets invested in infrastructure.

Still, its program has grown due to new investments and strong results, from $2.3 billion back in 2015 to $4.4. billion today.

One of CalPERS biggest international partnerships is with QIC, a large Australian money manager.

Back in 2015, CalPERS announced a more than $700 million Asia-Pacific infrastructure partnership with QIC. CalPERS provided capital as part of QIC’s acquisition, along with other institutional investors, of a 50-year lease to operate the port of Melbourne in Australia back in 2016.

While the investment is in the early stages, The CalPERS QIC partnership returned a 12.5% for the 12-month fiscal year ended June 30, 2018, shows CalPERS data.

CalPERS had invested $464 million in the QIC partnership as of June 30.

Tags: CalPERS, Core Assets, Infrastructure, Pension

The Dallas Police and Fire Pension Fund (DPFP) is implementing emerging markets debt into its $2.2 billion portfolio for the first time after its consultant Meketa Investment Group had recommended the benefits of the typically high-risk, high-reward asset class during the pension’s latest investment committee meeting.

Allocations to emerging markets debt have been on the rise within public pension plans, given their seasoned utility in gaining exposure to fast-growing, increasingly creditworthy emerging market countries and companies, providing an attractive return/risk opportunity.

Meketa highlighted several benefits to the inclusion of emerging markets debt to the public pension plan’s portfolio, noting that different regions perform better (or worse) at different times, meaning combining them in a portfolio allows investors to benefit from the assets’ different behaviors and reduce risk.

The consultant also noted that emerging markets have a lower starting point of economic activity and favorable demographics. Younger and larger populations have the capability to import sophisticated technology from developed nations and have it distributed throughout their markets, potentially leading to substantial economic benefits and large GDP increases over the coming decades.

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Additionally, Meketa pointed out that currently, currency emerging markets debt offers more than a 3% yield advantage relative to US Barclays Aggregate. Emerging markets comprise roughly 80% of the world’s population and approximately 40% of economic output, however, the emerging markets debt market is expected to grow from $24 trillion to nearly $40 trillion over the next five years.

Emerging market economics include much of Africa, Eastern Europe, Latin America, Russia, the Middle East, and Asia (excluding Japan).

Despite intrinsic risks to emerging markets debt investments, such as political risks, potentially volatile returns, higher transaction costs, and currency volatility, Meketa implored the DPFP to carry out its newly-minted 4% target allocation to the asset class in its $2.2 billion portfolio. A 4% allocation would amount to approximately $88 million.

“Given the long-term return expectations for the asset class, current yields, and the diversification benefits, we continue to have conviction in emerging markets debt as a strategic part of the portfolio,” Meketa said in a report to the pension.

Tags: Dallas Police & Fire Pension System, Emerging Markets, Meketa, Pension