CalPERS sets tracking error limit for global equity portfolio

CalPERS implemented new regulations to limit tracking error and control the level of risk in its $118.6 billion global equity program, Joseph Dear, chief investment officer of the $239.9 billion pension fund, said Tuesday.

The new rules, put into effect by the investment staff at the California Public Employees' Retirement System, Sacramento, limit the tracking error to the global equity portfolio to 75 basis points, Mr. Dear told CalPERS' investment committee on Tuesday. The CalPERS board would have to be notified if tracking error surpassed the limit.

CalPERS has a tracking error limit of 150 basis points for its entire investment portfolio but none specifically for global equity, Mr. Dear said.

Asked by CalPERS board member J.J. Jelincic why 75 basis points was selected, Mr. Dear said there is no absolute limit that makes sense, but the limit was part of an agreement with the board's risk committee.

The tracking error the portfolio operates at now is around 35 basis points, leaving Mr. Jelincic to question whether the portfolio's risk equity level was being increased. “We are not expanding the risk, we are constraining the risk,” Mr. Dear answered.

However, Michael Schlachter, a managing director and principal at Wilshire Associates who advises the CalPERS board, said the pension fund could be increasing its risk in the global equity portfolio because its practice has been to operate at the lower basis-point level.

Mr. Dear said the entire issue of how much tracking error is desirable in the portfolio will be discussed next year when CalPERS conducts an asset-liability study.