CalPERS, Just Missing Target, Broadens Its Investment Strategies

The giant pension fund is switching from return-oriented goals to a sharper focus on liquidity and strong betas.

The California Public Employees’ Retirement System (CalPERS) recently re-tooled its investment policies to enhance liquidity and diversify its investment approach. This move comes after falling short of its target for the recent fiscal year.

During a recent investment committee meeting, the committee decided to divide the pension program’s Global Equity Program between a “Market Capitalization Weighted Segment” and a “Factor Weighted Segment.” The market cap approach, which tilts more heavily toward larger stocks, and the factor method, which rests on assessments of such conditions as dividend payouts and stock quality in equity selection, would give CalPERS a broader range of strategies.

The strategy reshuffle comes amid slightly lower investment returns for the giant fund: It generated 6.7% in the 2018-19 fiscal year, ending June 30, falling just shy of its 7% investment goal. This is compared to 8.6% the year before, and 11.2% in 2016-2017. CalPERS’s funded status is 70%.

The primary purpose of the market capitalization-weighted segment is to provide the portfolio with an outlet for high beta, and returns correlated with economic growth while at the same time being a source of liquidity for the $354 billion portfolio.

Measuring risk on the market cap segment will be keyed to tracking error, or the divergence between actual performance and the portfolio’s benchmark. The pension is forecasting that the tracking error will stay consistent with the zero to 50 basis points range, but slight deviations are “allowed,” depending on current market conditions.

The factor weighted segment, on the other hand, is intended to have reduced volatility characteristics and some diversification of equity risk, while acting as a high source of beta as well. This, too, will be managed using tracking error.

Both segments of the global equity program are expected to help keep a tight maintenance on portfolio volatility.

The fixed income asset class also broke out into three separate strategies, each with their own strategic objectives: long Treasury, long spread, and high-yield.

The long Treasury segment is intended to serve as an economic diversifier to equity risk and be a reliable source of liquidity, while the long spread is to provide a reliable source of income and an additional source of liquidity. The high-yield segment is intended to provide exposure to economic growth and act as a reliable source of income, given its larger interest income.

Also, the new policies will shift reporting of certain internal rules violations from the pension’s board to the pension’s senior investment staff.

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