CalPERS Shift to De-Risk Portfolio Post-Election Cost $900 Million in Potential Returns

Nation’s largest pension fund reduced its exposure to global equities from 51% to 46%.

The California Public Employees’ Retirement System (CalPERS) shifted away from equities in September, a move that cost the nation’s largest pension fund $900 million in potential returns as US stocks soared to new highs after the Novembr 8 election.

Ted Eliopoulos, chief investment officer of the $311 billion pension fund, said CalPERS changed its asset mix amid worries about valuations and potential volatility. CalPERS reduced its exposure to global equities to 46% of its portfolio, down from 51% previously.

During this week’s board meeting in Sacramento, Eliopoulos described the rebalancing as “a tactical decision to take some risk off the portfolio for an interim period of time.”

“Certainly, when the stock market rallies for a few months and you’ve taken some exposure to equities off the table, you’ll suffer some loss of return for that time period,” Eliopoulos said. “But what we have to remember is that there are other markets, and they tend to cycle in.”

CalPERS moved to a less aggressive allocation last year, following two years of lower-than-expected returns. In addition to reducing exposure to global equities, CalPERS also cut its private equity mix to 8% of the portfolio, down from 10%.

CalPERS boosted its “liquidity” asset class, made up of short-term securities with maturities of less than 10 years, from 1% to 4% of the portfolio. And CalPERS increased its “inflation” category, which includes commodities and bonds linked to inflation, from 6% to 9%.

CalPERS board member Theresa Taylor urged Eliopoulos not to be too cautious in the pension plan’s asset mix.

But Richard Costigan, chairman of CalPERS’ finance and administration committee, said there’s no point in second-guessing the timing of the shift away from equities.

“We are trying to derisk because our beneficiaries are aging,” Costigan told Eliopoulos. “You’re under enormous pressure from the board to derisk the portfolio.”

CalPERS has been reining in its expected returns, and the fund is gradually lowering its discount rate from 7.5% last year to 7% by 2020. The pension fund will spend this year studying its asset mix and will determine next year what discount rate to use after 2020.

Meanwhile, CalPERS weighed in on the contentious Dakota Access Pipeline that would carry crude oil from North Dakota to Illinois. CalPERS joined 100 other investors asking major banks backing the 1,168-mile Dakota Access Pipeline to address the concerns of the Standing Rock Sioux Tribe.

The investors, which include four New York City pension funds, Boston Common Asset Management and Storebrand Asset Management, called on the banks "to protect the banks’ reputation, consumer base, and avoid legal liabilities.”

“Banks with financial ties to the Dakota Access Pipeline may be implicated in these controversies and may face long-term brand and reputational damage resulting from consumer boycotts and possible legal liability,” the investors said in a statement. “We call on the banks to address or support the tribe’s request for a reroute and utilize their influence as a project lender to reach a peaceful solution that is acceptable to all parties, including the tribe.”

By Jeff Ostrowski