Just Minor Adjustments to Portfolio Are the Smartest Move, 3 Key CIOs Say

A trio of investment chiefs overseeing a half-trillion dollars are preparing their funds for low interest rates without drastically overhauling portfolios.

Three investment chiefs, who hold $500 billion in combined assets, are preparing their funds to handle continuing low interest rates but otherwise expect to make just incremental alterations to their asset allocations.

“I don’t see us fundamentally changing the allocation,” Dan Bienvenue, interim CIO at the California Public Employees’ Retirement System (CalPERS), said during a Monday webinar held by the Council of Institutional Investors (CII).

That sentiment was echoed by Jonathan Grabel, CIO at the Los Angeles County Employees Retirement Association (LACERA), and Hershel Harper, CIO at the UAW Retiree Medical Benefits Trust.

Still, the fund leaders are considering sharpening investment strategies in the face of historically low interest rates, and concerns over the Federal Reserve’s continued asset purchases. CalPERS CIO Bienvenue said he’s considering taking leverage on the portfolio.

The strategy was proposed to board members this summer at the $400 billion fund, which CalPERS’s then-CIO Ben Meng contended would help the portfolio meet its expected 7% rate of return—a tall order.

“It’s got to be diligent and it’s got to be prudent, but that’s certainly something that we’re thinking about,” Bienvenue said. “Strategically taking leverage on the portfolio.”

Bienvenue is specifically considering using leverage to invest more in private equity, private debt, and real assets. By contrast, the fund is steering clear of fixed income.

LACERA’s CIO Grabel also acknowledged that portfolios are becoming increasingly complex to meet higher return thresholds. The investment chief said his fund is checking asset categories to ensure there are no unintended exposures in the $56 billion portfolio. The Los Angeles fund is also drilling down on fees and custodial relationships.

By contrast, UAW’s CIO Harper said his fund does not have the same challenges as the other two public pension funds, given that the portfolio is not required to meet steep return assumptions. The medical benefits trust for auto retirees keeps a heavy allocation in fixed income, about 60% to 70% of the portfolio.

But Harper does worry about any increasing health care inflation in the future, which, without any buffer, could challenge the portfolio going forward. Interest rates that continue to stay low over the next decade or so could also force the fund to rethink its overall asset allocation.

The investment head plans to increase his allocation to investment grade credit and structured products, as well as other alternative strategies that “have a lot less connectivity or correlation back to the market.”