CalPERS Updates Portfolio Allocation After Vote

The $345.1 billion California Public Employees’ Retirement System (CalPERS) investment committee has voted on changes to its portfolio during a meeting held Monday, ratifying a portfolio that is largely similar to current allocations, after a review of four candidate portfolios.

The new portfolio has a 50% allocation to equities as compared to other options under consideration, which would have significantly increased allocations to fixed income. With the new portfolio, CalPERS will still increase its allocation to fixed-income to 28% up from 20%. Real assets, which includes real estate, infrastructure and timber investments, will keep its 13% allocation, while private equity remains at 8%.

“We’ve done significant analysis to get to this point,” said Henry Jones, chair of the Investment Committee, said in a statement. “After reviewing the Capital Market Assumptions, hearing from our stakeholders, and considering the recent change made last year in the discount rate, we feel that this portfolio represents our best option for success while protecting our investments from unnecessary risk.”

The vote largely went according to plan, based on documents released ahead of the meeting, which indicated support for maintaining the status quo, but there was one dissenting vote—J.J. Jelincic, who wanted the pension to take more risk in the portfolio. Jelincic said during the meeting that CalPERS could afford the risk because of its long-term investment horizon. By taking on more risk, CalPERS could have also raised its return expectation to 7.25% up from the 7% in the chosen portfolio. That move would provide some contribution relief to constituent cities and agencies, which have already complained loudly about rising premiums. However, some on the committee worried that Jelincic’s plan could leave the portfolio overexposed to equities in a downturn.

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During the meeting, CalPERS CIO Ted Eliopoulos said he thought that the chosen portfolio offered a good balance and that the pension would be able to respond accordingly to changes in the market.

CalPERS reviews its asset allocations every four years to ensure alignment with the pension’s investment beliefs and to make sure that allocation targets are reflective of current market conditions.

Tags: Board Meeting, CalPERS, Fixed-Income, Pension

This week, the CalPERS investment committee will vote for one of four candidate portfolios that could change the pension’s asset allocations strategy for the next four years.

As CIO has previously reported, CalPERS is considering significant changes to its asset allocation strategy that could double investments in fixed-income or add significant risk to the overall investment strategy, by adding equities exposure. Required contributions from constituent cities and organizations could also rise considerably.

One of the options under consideration would essentially keep CalPERS investment portfolio as-is, and a consensus is emerging that the status quo is the way to go. During the pension’s November meeting, the vast majority of public comment from CalPERS constituents argued for keeping the current investment targets and contribution requirements. That position seems to be largely supported by the investment staff. In a memo released with the agenda items for the investment committee meeting on December 18, the committee recommends Candidate Portfolio C, which most closely resembles CalPERS current allocation mix.

In the memo, the investment office notes that Portfolio C maintains the current return mandate of 7% and will keep contribution expectations manageable for CalPERS constituents. Portfolio C also maintains the pension’s exposure to global equities, which are forecast to do well in 2018.

CalPERS consultants Meketa, Pension Consultants Alliance, and Wilshire Associates also all sent opinion letters in voicing support for Portfolio C, citing more favorable market forecasts.

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Portfolio C would also maintain the pension’s current portfolio allocation of 8% to private equity. CalPERS is said to be considering a deal with BlackRock to have the world’s largest asset manager take over CalPERS $26 billion private equity program. The BlackRock relationship is one of several options on the table to revamp how CalPERS invests in private equity.

A few years ago, the pension opted to make bigger allocations to fewer managers, but as CIO reported in November, questions have emerged about whether the pension traded away diversification and performance for limited cost cuts. The pension is considering splitting up that 8% among more managers going forward.

$344 billion CalPERS reported an 11.2% net investment gain and an increase of more than $24 billion in assets for the fiscal year ending June 30, 2017, according to its most recent performance report.

Tags: Board Meeting, CalPERS, Pension