Members of the CalPERS investment committee Wednesday indicated a preference for a new asset allocation that would put the assumed rate of return in a range of 7.25% to 7.5%. The current assumed rate of return is 7.5%.
The asset allocation, which would be applied from mid-2014 to mid-2017, would lower the target allocations for private equity to 12% from 14%, global equity to 46.5% from 50%, and the liquidity asset class to 2% from 4%.
Targets that would be increased are global fixed income to 18.5% from 17%, absolute-return strategies to 2% from zero, inflation assets to 6% from 4%, and real estate would increase to 11% from 9%. Infrastructure would remain the same at 2%.
Wednesday's action by the investment committee of the $274.8 billion California Public Employees' Retirement System, Sacramento, was not a formal vote on the three-year allocation. That will not take place until the committee's February meeting.
The portfolio for which the investment committee showed preference was one of five presented by investment staff. The portfolio most resembles the current policy portfolio for the pension fund. The investment staff said the expected volatility of the proposed portfolio would be 11.73%, compared with the current policy portfolio of 12.45%.
Eric Baggesen, senior investment officer for asset allocation, said the lower target for private equity was a reflection of the fact there are not enough high-quality private equity funds available in which to invest. He said CalPERS is the largest private equity institutional investor in the U.S. and already has around $31 billion invested in private equity and another $13 billion or so waiting to be deployed.
Despite CalPERS' current 14% target allocation to private equity, the actual allocation is 12%, he said. In the absolute-return strategy, Mr. Baggesen said CalPERS has 2% of the fund invested in the asset class, even though the target is zero.
Investment committee members at the meeting debated whether the absolute-return asset class was needed at all. Chief Investment Officer Joseph Dear voiced strong support for the program. He said while CalPERS' absolute-return portfolio has done well recently in terms of performance, executives would need an equity market downturn to see how well the strategy is holding up.
CalPERS over the past two years has assembled a new absolute-return investment team, which has diversified the fund's strategies. Mr. Dear cautioned investment committee members not to send the wrong signal to the team members; he said they might seek other employment if they thought they were not wanted.