CalPERS loses $900m after PE and stock cuts

The $302bn pension fund experienced a 30 basis points return reduction following its decision to lower its exposure to public and private equities in December.

The California Public Employees’ Retirement System (CalPERS) gave up around $900 million in returns after cutting its exposure to public and private equities in December.

Ted Eliopoulos, the chief investment officer of the US’ largest public pension fund, said Monday during the CalPERS board meeting that the fund has lost about 30 basis points in returns since the decision to lower its allocation to public and private equities.

As of the fiscal year ended 30 June, the $302 billion pension fund allocated 8.7 percent, or $26.15 billion, to private equity and had a target interim allocation of 10 percent to the asset class during that year.

In December, however, Sacramento-based CalPERS’ board approved the motion to cut the pension fund’s interim private equity allocation to 8 percent, as reported by Private Equity International. At the same time, it cut its global equity target allocation to 46 percent from 51 percent, while increasing target allocations for real assets and inflation-linked securities.

Eliopoulos had explained that decision in an earlier meeting: “As our system continues to mature, the need to generate additional cash flow out of the investment portfolio to close this gap between outgoing benefits and costs with the incoming contributions will put additional pressure on an investment portfolio already facing the prospect of a lower return environment with a volatile asset mix.”

He went on to say private equity is not viewed as a source of income, since the asset class produces cash flows from the appreciation in value and sales of private companies, and that CalPERS is sceptical about how much net cash flow it will generate going forward.

CalPERS maintained its long-term target allocation to private equity at 12 percent.

A CalPERS spokeswoman told PEI Monday that long-term asset allocations are set during each asset liability management (ALM) cycle, and that this new lowered target allocation will be in place until February 2018, when a new ALM cycle begins. 

In the one-year period ended 31 December, the pension fund’s private equity portfolio generated a 6.6 percent return on invested capital, beating returns generated in the previous year by 5.5 percentage points, as reported by PEI.