CalPERS does away with traditional asset allocations

The $220bn US public pension system will allocate 63% of its assets to its ‘growth’ pool of public stocks and private equity holdings.

The California Public Employees’ Retirement System (CalPERS), a hugely influential private equity LP, has decided to rethink the way it allocates its $220 billion in assets under management to various asset classes.

The pension system will sort its various investments into five major groups according to how they function in high- or low-growth markets and the prevailing inflation environment, it said in a statement on Tuesday.

Infrastructure, real estate and forestry assets – the so called “real” group – will account for 13 percent of the mix. This group will provide the pension with long-term income returns that are less sensitive to inflation risk, it said.

Public equity stocks and private equity will make up the “growth” group, which will provide the pension with exposure to rising markets, and will account for 63 percent of the portfolio.

The “income” group, comprising treasury inflation-protected securities and other fixed income securities will be 16 percent.

The other two groups will be “inflation” – comprising commodities and inflation-linked bonds – at 4 percent and “liquidity” – cash and easily convertible government bonds – at 4 percent.

“We learned in the financial crisis and the past recession that a liquidity crunch or inflation can have a significant impact on portfolio performance in ways that many investors didn’t anticipate,” said Rob Feckner, CalPERS’s board president. “We focused on assets and returns, but not enough on the risk of our allocations.”

The current allocations “won’t change much,” said George Diehr, who chairs CalPERS’s investment committee, but the pension will “now have a better way to look at risk and account for what’s happening in the markets and to re-categorize our assets according to what drives them.”

Joseph Dear, the pension’s chief investment officer, hinted at a conference earlier this year that the traditional asset allocation model may be discarded by CalPERS, but that illiquid assets such as private equity would continue to make up an important part of the portfolio.

In the statement Tuesday Dear commented: “You can’t get solid returns without taking risk, but we want to make sure we know what that risk is and that we’ll be paid to take it.”