The California Public Employees’ Retirement System (CalPERS) is considering major changes to its investment portfolio structure as part of an asset liabilities review the pension does every four years. As CIO reported earlier this week, the changes could include a significant increase to fixed-income, or the pension could vote on a candidate portfolio that keeps the asset mix largely the same.
On Monday, pension board members, city officials, and members of the public gathered to consider four possible options for the portfolio. The meeting turned contentious during the comment period, which saw city officials, lobbyists, and citizens argue stridently for the status quo. Why? The core issue for CalPERS constituents isn’t the perennial “active versus passive” debate or whether investment fees are too high. Instead, employers in the system are concerned that any change in the pension’s funded status would force higher pension payments.
Of the four options, two portfolios would significantly increase CalPERS investments in fixed-income. One candidate portfolio raises fixed-income investments to as much as 44%, up from the current rate of 19%. While adding to safe-haven assets might seem like the kind of risk-averse maneuver participants would hope to see from a pension fund, it would also lower the target rate of return below the current 7% level. A lower rate of return would immediately lower the funded status of the pension system, meaning higher payments for employers.
A third option would increase the rate of return to 7.25%, but would take on more equities risk and could lead to increased funding costs down the road—especially in the event of a market correction. By the end of Monday’s workshop, employers in the system were lobbying heavily for “Candidate Portfolio C,” which tracks very closely with CalPERS’s current allocations and return assumptions. CalPERS’s asset mix is 50% global equities, 19% fixed-income, 9% real estate, 8% private equity and 2% infrastructure.
Supporters of Portfolio C argue that the current trajectory would give employers crucial leeway on payments to avoid adding constraints to already tight budgets.
CalPERS is slated to vote on one of the four portfolios in December.
Board questions CalPERS private equity strategy, ramps up real assets
There were also hints during Monday’s board meeting and asset liabilities workshop that even if Portfolio C wins the day, CalPERS would be taking a closer look at its private equity investments.
Under both the current asset mix and Portfolio C, private equity would receive an 8% allocation. However, that 8% could go to more managers in the future. Several years ago, CalPERS pared back the number of private equity funds it invests in, opting for larger allocations to fewer managers. The goal of this strategy is to use bigger allocations as a carrot to get lower fees from GPs. Now, with the portfolio under the microscope, the approach may change in favor of greater diversification. CalPERS has directed pension consultants from Meketa Investment Group to reassess the private equity portfolio and make recommendations about how best to optimize allocations to the asset class.
Many pensions followed CalPERS’s decision to make larger allocations to fewer managers, leading to significant activity on the private equities secondaries market over the past four years. A shift back the other way could be significant for the dynamics of an already-frothy private equity market.
CalPERS is also planning to realign its real assets portfolio, bringing its investments in infrastructure and real estate under the real assets umbrella in the new portfolio.
In a taped comment following Monday’s meeting, Paul Mouchakkaa, CalPERS’ managing investment director of real assets said that the real assets portfolio “is increasingly meeting its role in the composite fund of CalPERS. Going forward, we hope to grow our infrastructure and real estate holdings and take on initiatives around ESG integration.”