CalPERS to Review Whether International Stock Holdings Should Be Reduced

A decade ago, the largest US pension plan decided to abandon its home country bias favoring US stocks. Now, pension officials wonder if it was the right move as US stock performance has shined.

The $360 billion California Public Employees’ Retirement System (CalPERS) will be conducting a review of its decision a decade ago to reduce the weighting of US stocks and increase international exposure in light of its underperformance by institutional peers who stayed more focused on the United States.

“I think it’s a good point to rethink our basic assumptions and especially one which is so crucial as to whether or not we should have home [country] bias,” said Elizabeth Bourqui, the pension system’s chief administrative investment officer, at a meeting of the system’s investment committee on September 24.

Bourqui said the CalPERS investment staff has begun to study the issue but a full evaluation won’t occur until the plan conducts a scheduled review in 2020 that looks at CalPERS’s overall asset allocation. She said the system plans to examine the issue of whether CalPERS should have a US home county stock bias “in an extensive manner.”

The CalPERS board would have to approve such a change.

Until now, CalPERS investment staff has argued that US stocks were overvalued, and the nine-year bull market for US equities could reverse. This, they said, justified a large allocation to international stocks with their more attractive valuations and room for increased earnings and stock price growth.  But international stock performance has continued to disappoint.

The MSCI All County All World ex-US index saw a 7.28% gain for the June 30 fiscal year used by most pension plans. In contrast, the Wilshire 5000 total market index, which tracks US stocks, saw a 14.66% return in the same period. Over the last 10 years, US stocks have had more consistent, positive investment results compared to more volatile swings in international equities.  

CalPERS, the largest US retirement plan, made a 11.57% return in the 12-month fiscal year ending June for its $176.7 billion equity portfolio. Wilshire Consulting, its general investment consultant, in a September 24 report, said CalPERS fell in the 56th percentile for equity returns among public pension plans with more than $10 billion in assets under management for the fiscal year.

Wilshire found that pension plans in the 5th percentile had an average 17.37% equity return. In the 25th percentile, the pension plans saw a 12.51% average return, and in the 50th percentile, saw an average 11.90% return in the June 30 fiscal year.

CalPERS US equity exposure amounted to a 54.8% weighting for its global equity portfolio, a number generally reflective of the number of US companies in the global stock market.  International stocks compromise a 45.2% rating.

Wilshire also found that CalPERS was in the bottom 84% relative to other pension plans in US stock holdings but in the top 14% of plans in its international equity exposure.

CalPERS lead Wilshire consultant Andrew Junkin said at the investment committee meeting the decision was made a decade ago for a more global equity portfolio because it was felt that the pension plan could take advantage of global growth opportunities, not just US-centric investments.

It apparently wasn’t seen at that time the headwinds that would occur over the following years overseas. Economic trouble and political controversies in Europe, concerns over the Chinese economy, and even the strength of the US dollar compared to foreign currency have all limited international stock prices.  

CalPERS’s equity performance is not just lagging peers for the last fiscal year; the situation has persisted for the last decade. The Wilshire report found that CalPERS, relative to the market performance of peers, was in the 56th percentile for the three-year period, the 53th percentile for the five-year period, and the 75th percentile for the 10-year period, as US stocks outperformed international stocks and CalPERS was unable to take full advantage.

CalPERS had not disclosed just how many billions in investment returns it lost because of the board decision to abandon the US home county bias in favor of a more global weighting. For the 10-year period ending June 30, a period which included the great financial crisis, CalPERS saw an aggregate 6.74% return in its 75th percentile ranking. In contrast, pension plans in the top 5th percentile saw an 8.63% aggregate return.

“That is a decision that has had a negative impact on returns,” Junkin told the investment committee regarding CalPERS board embrace of a more global equity portfolio. He noted that abandoning the US home country bias, “could’ve easily gone the other way.”

Indeed, no one has a crystal ball, and there are investment consultants who can line up either way. The pro-US equity market advocates say the good times will continue versus those who argue that the US bull market is bound to reverse course shortly, giving international stocks their day in the sun finally.

Wilshire, for one, is recommending that the status quo continue for CalPERS. Junkin said the consulting firm has taken the same stance with all its clients.  “We believe that exposure to  to global GDP growth is best expressed through a global equity portfolio,” he said.

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