CalPERS Revises Fixed Income and Public Equity Investment Policies

The policies move away from return-oriented goals to being a source of liquidity and strong beta.

The California Public Employees’ Retirement System (CalPERS) approved a few revisions to its investment policies regarding its public equity and bond portfolios during a recent investment committee meeting.

One key point of the change in policy is a division of the pension’s Global Equity Program between a market capitalization weighted segment and a factor weighted segment.

The primary purpose of the market capitalization weighted segment is to provide the portfolio 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.

Active risk for the segment will be managed using tracking error, or the divergence between actual performance and the portfolio’s benchmark. The pension is forecasting that the tracking error will stay consistent, within the zero to 50 basis points (bps) range, but slight deviations are, of course, “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, tying returns to economic growth. This, too, will be managed using tracking error, with the same assumptions as the market capitalization weighted segment.

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

The fixed income asset class also broke out into three separate “asset segments” or 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 meant 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.

Interest rate risk of the long Treasury segment will be controlled using duration management, with the duration maintained at +/-10% of the benchmark. Sector risk of the long spread segment will be controlled by sector ranges that specify the degree by which allocations may fluctuate from the benchmark weights.

Also, the new policies will divert reporting of certain violations of investment restrictions and constraints from the pension’s board to the pension’s senior investment staff.

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