A little over a year after taking the job of chief investment officer for the California Public Employees' Retirement System, Stephen Gilmore led the $615 billion plan to become the first U.S. pension to adopt a total portfolio approach — a strategy typically championed by large sovereign wealth funds.
Unlike traditional strategic asset allocation, which manages asset classes in isolation with fixed benchmarks, with TPA, every investment is judged by its contribution to the entire portfolio’s goals, not just its own asset class. The approach uses risk factors as a common lens, which forces each investment to compete for capital and prove its value to the overall fund’s objectives.
For Gilmore, the total approach also compensates the team based on the entire performance: “We have the investment team rewarded on the basis of the total portfolio performance rather than individual asset classes.”
Speaking with Institutional Investor this week, the former CIO for the New Zealand Superannuation Fund explained why CalPERS made the switch to TPA (it’s “about optimizing the whole portfolio, rather than individual asset classes”), how it can handle geopolitical shocks (“We should be thinking about … how the portfolio responds to those various scenarios”), and how this approach is not just for the megafunds (in fact, “it's probably easier for smaller entities to pursue this sort of approach”).
The following interview has been edited for length and clarity.
Institutional Investor: CalPERS has now become the first public plan in the U.S. to adopt the total portfolio approach to asset management. What made you decide to make this switch?
Stephen Gilmore: Well, the main focus is on achieving our objectives, of course. We want to generate strong risk adjusted returns to pay pensions. And one of the trends in the industry — not so much in the U.S., but certainly offshore — has been for more and more funds to gradually adopt a total portfolio approach.
It comes down to constructing a portfolio that's in line with the ultimate objectives. Now you might think that's what we always do, even with a strategic asset allocation. Well, that's the intention, but what tends to happen with strategic asset allocations is that investment teams tend to stick to those benchmarks, and they can be in place for quite a long time, so they're not as flexible and nimble as they probably could be when you get changing pricing and dynamics in opportunities.
So, the big driver is thinking about optimizing the whole portfolio, rather than optimizing individual asset classes. And when you optimize your individual asset classes, you end up perhaps having more specification within asset classes, you tend to also stretch the target that you've got to fill the bucket and doing that can lead to suboptimal results.
The work that we've been doing has clearly shone a light on how much risk we want to take in the portfolio, and that becomes much clearer when we're using a total portfolio approach. Likewise, I think there are some governance advantages: The setup is such that this move to a total portfolio approach will make the management team more accountable, and with that greater accountability will come even greater transparency. So, there are a whole range of reasons for going down this route.
The challenge, of course, is: It's a big change, and you've got to deal with change management. And also, the key thing, really, is having the right degree of collaboration, where everyone is focused on the ultimate objective.
Now we had some things in place already, which made it easier to go down this path. One of the things that we had in place was to have the investment team rewarded on the basis of the total portfolio performance rather than individual asset classes. So that's consistent with the total portfolio approach. Also, we had one of the major asset classes — private equity — already benchmarked to listed equities. So those things help when transitioning to a total portfolio approach.
I think the third thing I'd highlight is we'd started this journey to revamp our data analytics, so we had better information. And again, that's something you want when you pursue this sort of approach. So we had a lot of enabling conditions.
And then there were other, I guess, desirable or attractive features related to the transparency to the government and to the accountability. And of course, ultimately, there's an expectation that we can generate stronger risk adjusted returns by optimizing for the whole rather than optimizing asset class by asset class.
Why is now the time to go to TPA?
Gilmore: When I came in, my intention was to listen, to look at the lay of the land, and to try and understand the big picture. We were about to embark upon an asset liability management review, something that takes place every four years, and we would interim check in every two years. And I really had to form a view as to whether I wanted to continue in this direction. We had these discussions with the investment committee and the board, and there seemed to be a willingness to contemplate moving in this direction.
Early on, I showed how our portfolio could be reasonably well proxied by a simple combination of equities and bonds like an off-the-shelf portfolio. And we as a management team should be doing better than that. I also think the investment committee liked the idea that management would be more accountable for the portfolio and the outcomes. And hence we proposed to the board that we move in this direction and go live for the first of July. So really, the timing was a function of our own internal asset liability management review process.
Do you think more institutions will adopt this approach going forward?
Gilmore: They've been doing that, yes. Unsurprisingly, quite a few people reach out and are interested in our journey. You really need to think about it as a continuum, rather than someone's fully engaged in a total portfolio approach versus someone who's fully engaged in a strategic asset allocation. There's a whole spectrum of things in between. But the WTW Thinking Ahead Institute’s study shows that those following a total portfolio approach tended to generate higher returns.
What do you say to the argument that TPA is really only for the big players like the sovereign wealth funds or the large state plans, like your CalPERS and your CalSTRS?
Gilmore: I would say it's easier if you're small. And I would say that if you're an individual managing a portfolio, you're probably not going to have a strategic asset allocation. You're probably going to be thinking, ‘What's my objective, and how do I structure the portfolio?’ I would push back on that it's only for the large.
There are some things that large players can do that small players might not be able to do, and that relates to the information and being able to look through the portfolio and to look through the exposures, scenarios, factors and so on. So, while there could be a higher degree of sophistication that comes with size, it's probably easier for smaller entities to pursue this sort of approach.
Now that CalPERS is taking this total portfolio approach, what specific changes to the portfolio will be made?
Gilmore: Look, I don't think you're going to see dramatic changes. It's more of a mindset. I'll give an example about private market investments. People sometimes think TPA means we're going to be a lot more dynamic and a lot more agile. But a decent part of the portfolio is invested in private assets, and those assets by definition tend to be illiquid, and you can't change that quickly.
Likewise, the way we invest in these assets. There’s a horizon that we need to be taking into account. That will influence the portfolio.
The big thing is really around the mentality. You compare each investment against every other one. Conceptually you do it so you have a consistent way of looking at the cost of capital for all the investments.
You could see some changes related to those investments that might fit between traditional asset class buckets, because we’re thinking about the whole portfolio. We could be seeing something which might be opportunistic, or something as a hybrid, or something that's, for us, a diversifier. You might see more of those types of exposures, because we'll be looking at those investments in the context of the whole portfolio.
Looking forward, what are the biggest challenges you're preparing for and biggest trends you're excited about?
Gilmore: There are always challenges, but sometimes those challenges become opportunities. I'll give you one example: Some of our peers find challenges in some of the private markets because distributions have been lower than in the past. But we think that actually provides an opportunity, because our liquidity position is somewhat stronger than others.
You've got to think about how we might see something versus how others in the industry might see something, given the position we have. That could be an area of opportunity for us if others are shying away from it.
There's so much going on in the world and a lot of conversations around what's fundamentally changed. It's quite hard to separate the signal from the noise. And of course, given the size of the portfolio, there are limits to how we can change things.
Could you touch on how you’re thinking about some of these big issues like geopolitics? CalPERS is a big ship, so I was interested in hearing more of your thoughts on this.
Gilmore: Geopolitics I find fascinating. I used to work as an emerging market strategist, so I was always quite interested in the politics of individual countries and also the big picture. People would spend a lot of time focusing on these questions, but they very rarely made that much difference in terms of the markets. A big exception was during the 1970s when you had the oil shocks, so you had this negative supply shock, and obviously inflation and growth. Since then, there aren't very many big geopolitical shocks that we can point to that have had dramatic market impacts.
I tend to think: Are these shocks going to affect supply dynamics? Yes, we have some things that can affect this, such as supply chain resilience, fragmentation, different trade blocks. But you've got to be thinking about what the market is pricing in versus where you think the markets missed something. We should be thinking about the possible scenarios that we could be going through and how the portfolio responds to those various scenarios. The challenge, of course, is that you can't construct a portfolio that's going to be resilient to all those different scenarios. If you did, you just wouldn't generate very strong returns.
So, while I find geopolitics fascinating, I have to be thinking about: Does it matter for the portfolio? And if it does, what's the market pricing?
If you had been told back at the beginning of 2025 that you would have the tariffs being imposed the way they were in April and that the US and Israel would bomb Iran, you would probably think that inflation would be higher, growth would be lower, oil prices be higher, etc. But that wasn't the case. The tariffs ended up being reasonably manageable, and growth was somewhat stronger, though partly that was connected to AI and the level of capex. But even if you were told certain things were going to happen, you've got to be thinking about the other responses. There could be other shocks to the system. It's quite hard to actually know in advance how things are going to play out, even when you are told about some potential shocks.
