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CalPERS Sticks With Equities

A plan to de-risk the $345 billion pension meets opposition from stakeholders.

  • By Amy Whyte

The California Public Employees’ Retirement System has decided to make few changes to its portfolio next year after considering a smaller exposure to equities.

At the pension’s investment committee meeting Monday, nearly all of the 13-member board voted in favor of a portfolio most similar to the $346 billion fund’s current asset allocation. CalPERS’ global equity exposure will be kept at 50 percent.

The investment staff had presented the board with four potential portfolios, including two options that would have cut back on equity investments in favor of higher allocations to bonds. During the meeting, Chief Investment Officer Ted Eliopoulos addressed board member concerns about how the equities markets will perform in the near future, including how the new GOP tax plan will impact the pension fund’s investments.

“If equity markets run some more next year, we’ll be disappointed,” Eliopoulos said. “If they sell off, we’ll be moderately happier than having selected perhaps a higher risk portfolio. But at the end of the day, we’re not predicting one or the other. We’re recommending a portfolio that has some balance in the face of the uncertainty that’s coming.”

Only outgoing board member J.J. Jelincic, who supported increasing the fund’s commitment to equities, voted against the portfolio.

“I think we need to take more risk,” he said. “We’re long term investors; our biggest advantage is that we can be long term investors.”

An agenda published ahead of the meeting showed that the staff and its consultants supported the option selected Monday, citing lower implementation costs and the ability to keep CalPERS’ target discount rate of 7 percent. Had the board chosen to de-risk the portfolio, the expected return, and therefore the discount rate, would have gone down, and California cities would have been required to make higher pension contributions. A higher equities allocation, like Jelincic suggested, would have lowered the contribution rate.

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The pension’s private equity exposure will also stay the same, with the pension maintaining an 8 percent commitment to the asset class. Fixed income, which made up 19 percent of the portfolio in September, will be increased to 28 percent, as inflation-hedging assets are eliminated. Liquidity assets, which made up a 4 percent allocation, will be reduced to 1 percent.

As part of the new asset allocation, CalPERS will also combine its current real estate, infrastructure, and forestland investments into a single real assets allocation, representing 13 percent of the new portfolio.

The new asset allocation has a “blended” expected return, combining short-term and long-term forecasts, of 7 percent, with expected volatility of 11.4 percent.

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