Ahead of Asset Allocation Vote, CalPERS Bends Toward Simplicity

Allocation strategies changes could double investments in fixed-income or add significant risk to the overall investment strategy.

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.

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