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CalPERS approves new asset allocation

New portfolio holds to 7.5% rate of return

J.J. Jelincic

CalPERS approved Tuesday night a new three-year asset allocation that maintains the $282.5 billion pension fund’s expected rate of return at 7.5%.

The new target portfolio, which is scheduled to go into effect July 1, reduces the target allocation to global equities to 47% from 50% and private equity to 12% from 14%, while increasing fixed income to 19% from 17% and real estate to 11% from 9%.

The target portfolio also reduces absolute-return strategies to zero from the current 2%. That, however, won’t affect the $1.8 billion that the California Public Employees’ Retirement System, Sacramento, has invested in absolute-return strategies because the pension fund’s range for that allocation is zero to 4%.

The portfolio picked by the CalPERS board has an expected annualized rate of return of 7.15% over one to 10 years, and an expected 7.56% over one to 60 years. In comparison, the current portfolio’s return is 7.25% over one to 10 years and 7.63% for one to 60 years. The new portfolio however, has a lower expected volatility rate, 11.76%, compared to the current policy portfolio’s volatility rate of 12.45%.

Employer contributions will increase 0.2% to 2% and will be phased in between July 1, 2014, and July 1, 2016, depending on the employer group.

According to a CalPERS analysis, despite maintaining the 7.5% rate of return, the probability of the funding ratio falling actually increases under the new portfolio. For CalPERS’ state miscellaneous plan, the probability of falling below 50% funded at anytime over the next 30 years is about 44%; previously it was 41%. That plan is currently 66.1% funded; overall, CalPERS is 69.6% funded. CalPERS officials said the reasons for the higher risk include a lower mortality rate among CalPERS members, less disability retirement for state workers and earlier retirements for public safety officers.

One board member, J.J. Jelincic, voted against the approved portfolio when it was before the investment committee. Instead, Mr. Jelincic opted for an alternative one with a higher annualized rate of return, 7.27% over one to 10 years, and 7.66% over the one- to 60-year period. That portfolio would have kept the 50% allocation to equities.

Target allocations for smaller asset classes also will change under the new portfolio.

The allocation for inflation-sensitive securities, including commodities and Treasury inflation-protected securities, will increase to 6% from 4%, while the combined infrastructure and forestland allocation will increase to 3% from 2%. The liquidity asset class, including cash and short-term securities, will decrease to 2% from 4%.

Rob Feckner, CalPERS board chairman, spoke briefly after the vote saying the new allocations will enable CalPERS to meet its return expectations while taking less risk than under the current asset allocation program.

The new target allocations are scheduled to run until the end of June 2017.