CalPERS on Monday adopted new investment policies for its private equity and real assets programs despite board member concerns that a new customized investment account definition was vague and questions about the removal of the requirement that the manager be in the top quartile.
The $388.4 billion California Public Employees' Retirement System, Sacramento, had $42.4 billion in real assets and $26.2 billion in private equity as of Oct. 31.
Much of the discussion centered on the new customized investment account in CalPERS' private equity investment policy, which only requires the account manager to have "appropriate investment expertise for the proposed investment strategy."
Although the investment committee approved the investment policy statements, board member questions about the use of the non-financial term "appropriate" prompted staff to return with a rewrite of the sentence in question.
Steve Hartt, principal of Meketa Investment Group, the board's private equity consultant, said requiring the customized investment account to be in the top quartile is "backward-looking and does not capture all the elements that staff would consider when selecting a manager" for that account. He told the investment committee that the top-quartile definition limited the managers CalPERS could invest with.
"There's been relatively few customized investment accounts over the last couple of years," Mr. Hartt said.
CalPERS CIO Yu Ben Meng reiterated that manager track records are backward-looking and added that staff is trying to look beyond performance data. "The reason the past performance may be relevant is only in a sense that it may help us to predict the future performance," Mr. Meng said. However, performance data is imperfect because none of the data providers have complete information, he said.
Loosening the definition allows staff to look beyond past performance to other factors such as whether the skills of managers responsible for past performance are those needed to generate returns in the future, Mr. Meng said.
California Controller Betty T. Yee, who also is a CalPERS board member, asked what will happen when the board consultants and staff disagree.
In response, Mr. Meng said that in the past if there was a difference between the staff and the consultant's prudent person opinion, the matter was brought to the board to decide. So, it's not required for the consultant "be on the same page all the time (with staff). We learn from each other all the time," Mr. Meng said.
Separately, during an education session, Mr. Meng said that he thinks CalPERS should add private debt to its portfolio. He said the asset class has grown substantially since the financial crisis and noted that the board would discuss the investment strategy in closed session.
"It's not currently in our portfolio but we think it should be," he said.