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Common equity benchmark to enhance risk management — CalPERS officials

Investment officials of the $316 billion California Public Employees' Retirement System are making their case for better linking the Sacramento-based system's private equity program with its global equity program by use of a common benchmark for both portfolios.

Chief Investment Officer Theodore Eliopoulos told the system's investment committee Monday the common benchmark would prevent “silos“ and foster better communication between staff members managing each asset class.

The proposed changes come as Mr. Eliopoulos continues to lead a review of the structure of the private equity program, which includes reviewing whether CalPERS should cut out general partners and make private equity investments directly. Mr. Eliopoulos did not discuss the review Monday, but CalPERS spokesman Wayne Davis said he is expected to give a report at the another meeting over the summer.

But Mr. Eliopoulos and investment staff were not shy in expressing their views on the idea of a common benchmark. Eric Baggesen, CalPERS managing investment director, asset allocation/risk management, told the investment committee the aim is to reduce overconcentration in particular sectors in the nearly $26 billion private equity portfolio and the $148 billion public equity portfolio, enhancing risk management.

One example cited was a private equity buyout fund buying up a major pharmaceutical company while CalPERS is overweighting pharmaceutical companies in its public equity portfolio. Mr. Baggesen said a common benchmark would help facilitate better communication, allowing portfolio managers in public equity portfolio to reduce pharmaceutical company allocations.

Mr. Baggesen said investment staff is focusing on better risk management. He related what happened during the financial crisis, when CalPERS lost about 25% of its value. He said the downturn in equity markets also affected the retirement system's fixed-income and private equity portfolios because of equity risk in both.

But board members questioned if coordination between private equity and public equity investment staff was possible because private equity investment information often has a time lag while public equity information is relayed in real time.

Sarah Corr, acting investment director, private equity, said the staff is now able to access real-time information on private equity investments through its private equity database 65% to 70% of the time.

CalPERS uses a custom benchmark for private equity consisting of the FTSE U.S. Total Market index and the FTSE All World ex-U.S. index, plus 300 basis points. The new benchmark, now used for public equity, would consist of the FTSE Global All-Cap index plus a yet-to-be-determined return premium.

The investment committee did not vote on the benchmark Monday; that vote is expected to come as part of an overall vote on a new asset allocation in February 2018.