CalPERS budgets more for opportunistic strategies fees amid dislocation

The increased estimated fees for the Opportunistic Strategies portfolio come amid exactly the type of market dislocation for which the portfolio was partly designed.

California Public Employees’ Retirement System‘s proposed 2020-2021 fiscal year budget includes a boost in estimated investment fees it pays to external managers for its Opportunistic Strategies portfolio, according to documents posted ahead of its next board meeting.

The estimated $3.9 million rise in external management fees comes amid just the sort of market dislocation for which the portfolio was designed. The budget is set to be presented to the Finance and Administration committee on 21 April.

The Opportunistic Strategies portfolio was launched in 2017 and is designed to allow the fund to “access investment opportunities outside of the existing asset classes”, according to the pension’s website. The strategy is run by managing investment director Kevin Winter.

The fees estimate rose from $1.5 million for 2019-2020 to $5.4 million for 2020-2021. The boost in fees for this programme comes amid a decline in overall estimated external management fees. Staff estimates total external investment fees for the coming fiscal year will be $685.9 million, a decrease of $213.9 million from the year before. This change is “due to a reduction in external manager contracts and increased reliance on internal investment staff”, the budget document said.

Overall, the budget was 10.8 percent less than the year before, which staff mostly attributed to this decline in external management fees. The largest declines in the budget were in the global equity and multi-asset classes. Last fall, CalPERS fired many of its public equity managers, as reported by Chief Investment Officer. 

CalPERS declined to comment on the budget ahead of the meeting. It was unclear if this was a planned increase in the budget or an action taken in response to the ongoing coronavirus crisis, which has caused considerable losses to CalPERS’s fund value. Its total portfolio value topped $400 billion in January but stood at $369 billion as of Monday, according to its website.

Building out

Last August, staff and consultants presented the board with an annual review of the Opportunistic Strategies programme.

The Opportunistic Strategies programme is split into three main parts: Execution Services and Strategy, an enhanced beta program and a third “truly opportunistic” section of the programme, intended to be used in market dislocation, according to a presentation of the programme.

CalPERS CIO Ben Meng told the board that some of the opportunities from a future market dislocation could involve the private markets.

“When the crisis comes, usually the distressed shows up in the credit markets and we’re trying to prepare ourself to take advantage of the distressed credit opportunities when the opportunity comes,” he said, according to a transcript of the meeting.

Since March, the public markets have been extremely volatile due to the coronavirus pandemic and the resulting shutdown of much consumer activity. Private equity fundraising, due diligence and deals overall have also been disrupted.

The budget also called for a modest rise in the private equity fees budget, from $295 million in 2019-2020 to $300 million in 2020-2021, a 1.7 percent increase. The total proposed budget is $1.694 billion.

The Finance and Administration committee is scheduled to meet on 21 April, where it will decide whether or not to approve the new budget. The meeting will be conducted via video conference.