CalPERS plans to increase its emerging markets stock allocation over time from its current 10% weight in the pension fund's global equity portfolio, Chief Investment Officer Joseph Dear said in an interview.
Mr. Dear didn't say how much the increase would be; he said the issue will be taken up next year when CalPERS reviews its overall portfolio allocation review.
Mr. Dear's comments came Monday after the Sacramento-based California Public Employees' Retirement System's workshop on its global equity portfolio, a prelude to the formal asset allocation review that will take place next year for the pension fund's entire $239.3 billion portfolio. U.S. stocks make up the largest share of the CalPERS' global equity portfolio at 48%, followed by international developed markets at 42%.
The pension fund has been reviewing its 35 active global equity managers to determine whether some of them should be replaced by new managers or whether CalPERS should internally manage the portfolio. No timetable has been set for the review to be completed.
Global equities make up almost half of CalPERS' total portfolio, and Mr. Dear said the 10% allocation for emerging markets equities is too small.
“That's where expect the biggest growth; the (global equity) portfolio needs growth to reach its target return rate,” Mr. Dear said, commenting on CalPERS' 7.5% assumed annual rate of return.
Mr. Dear said CalPERS was in “no great hurry” to increase the emerging markets equity allocation, noting that “the entry point makes all the difference in this business.”
At the workshop, John Cole, CalPERS senior portfolio manager, global equities, said the biggest economic growth is occurring in emerging markets nations where the middle class is expanding.
Mr. Cole said CalPERS was currently in a “pessimistic state” about growth opportunities for U.S. companies given the current economic problems in the U.S. economy. However, he said CalPERS remains committed to keeping a large U.S. equity portfolio, noting that the U.S. is a resilient country that has overcome past economic problems.
CalPERS thinks that active management is the best way to manage emerging markets equity, Eric Baggesen, senior investment officer, global equities, told CalPERS board members at the workshop.
Mr. Baggesen said the in-depth knowledge needed to navigate emerging economies requires an active manager to pick the right investments in those countries.
Mr. Cole said that managing a large number of active equity managers is a difficult task. He said CalPERS' investment staff is concerned that the pension fund's various equity managers with their different investment philosophies are canceling out each other's efforts at adding value to the CalPERS portfolio.
“The effect of that is that we pay high fees and when we are all done, much of the good that has been done is neutralized at the portfolio level,” Mr. Cole said. “To call it difficult I think is an understatement.”