Mark J.P. Anson, chief investment officer for the $136 billion California Public Employees' Retirement System, Sacramento, doesn't sleep much. He spent a year waking up at around 2 a.m. to write his third book, "Handbook of Alternative Assets," published this spring by John Wiley & Sons. At one time, he harbored a desire to become a world-class downhill skier. Instead, he became, in turn, a securities lawyer, a derivatives specialist and a portfolio manager. Now, he oversees CalPERS' domestic and international equity and fixed-income investments, real estate investments and a host of alternatives, including its nascent hedge-fund program, currency overlay, domestic long/short and corporate governance programs. He spoke with P&I's Joel Chernoff.
Q If you had $1 billion of your own money, where would you invest it now?
A At my age (44), I'm still a reasonably young guy. I have a long investment horizon in front of me, so the bulk (two-thirds) would go into the stock market. Right now, on a tactical basis, that allocation would be more to international equity markets than it would be to domestic. I would concentrate on euroland, the U.K., and emerging markets.
I would keep about 20% in U.S. government bonds. And the remainder of my portfolio I would hold in cash. Normally I like to be fully invested, but who knows how many other corporate scandals are out there that have yet to come to light.
Q Do you expect to shift more assets to internal management at CalPERS?
A I would like to. One, clearly, we save direct investment management costs when we manage internally as opposed to externally. Second, I now have a great investment staff. They're intelligent, they're well-educated. Third, (it's) good for PERS and the investment staff.
Q Why has CalPERS' allocation to hedge funds gone out so slowly?
A I have to smile when you ask me that question. I think it was 21/2 years or so ago, there was an erroneous report that CalPERS was going to invest over $11 billion in hedge funds. In fact, then, we were criticized for putting too much money into the market. Now we're being criticized for putting too little money into the market.
As a matter of fact, we have invested now through our hedge fund program $352 million. And the reason we proceeded slowly was threefold. First, we wanted to make certain we had the infrastructure in place at CalPERS, that we had our accounts set up, that we had the reporting coming in from our hedge fund managers to State Street (Bank & Trust Co., the fund's custodian) so we could capture the returns. Second, I needed to sit down with our strategic adviser, Blackstone Group, and (lay out) the economic parameters of the program. And third, what I wanted to do was build a portfolio of hedge funds before we invested our money.
Q How many managers do you think you'll use? Are you sticking with a target of $1 billion, or is $3 billion to $5 billion a possibility?
A I think somewhere in the range of about 15 (managers) is my guess. I know there are some fund-of-funds managers who would say you should have 20 or 30 - some might even say 50 - in a hedge fund-of-funds program. But I'd rather have a smaller number of managers that I know very well.
The board approved a $1 billion allocation to the program. Is it possible to get up to $3 billion? I think it's possible (subject to board approval). It's hard for me to see us getting to $5 billion.
Q How long do you think the good times are going to roll for real estate?
A There has been some talk as to whether we are in a real estate bubble. I'm not quite certain we're in a bubble, but we've certainly seen real estate stay strong through this recessionary period ... People forget that if you go back 20 years - to 1980, 1981 or so - real estate was the predominant asset class in everyone's portfolio. ... Now that we've had two bad years in the stock market, people are remembering that real estate is indeed a valuable asset class.
Now, how much longer will this continue? We had great returns in real estate last year. Our real estate portfolio returned almost 12% v. 6.5% for the NCREIF (Property index), and that's where we come out with the 536 basis points of outperformance. Where will returns be over the next year? They may not be double-digit. We may be back in the 8% to 9% range for real estate over the next one to two years.
Q How are you positioning CalPERS' $13 billion real estate portfolio?
A We had approved our ($500 million) opportunistic real estate portfolio, where we can take investments (inside and) outside the borders of the U.S. in real estate funds and mezzanine debt funds.
The way that we are positioning real estate now is we're sticking with dominant properties. For instance, through our Hines National Office Partners, we take equity stakes in prime office buildings. The same thing with our dominant mall strategy, where we are producing equity stakes in the largest and best regional malls in particular areas, such as Oakbrook Mall, outside of Chicago, or Galleria Mall in Scottsdale, Ariz.
One thing we may look at a little more closely is hotels. We're looking to do that, not only in our REIT portfolio, but also as part of our equity investments. The thinking there is, one, it's cheap. As a result of 9/11, prices are depressed, so it might be a good time to buy in. And two, it's not a sector to which we've had a lot of exposure in real estate.
Q What have you learned about private equity?
A I think what we've learned is that if you're a long-term investor in this asset class, a lot of opportunities present themselves. We're looking at secondary distributions. A number of other investors are selling out and trying to liquidate parts of their private equity portfolio ... So, that's one area where we can be opportunistic.
Another way is through our strategic relationships. When you're in a down market like this, capital contributions tend to dry up from investors. But the good firms out there, they're really looking for long-term strategic relationships with partners like CalPERS. This is an opportunity for us to get into their better funds.
We see more opportunities in a down market, in fact, than we see in an up market. In an up market, money tends to get thrown at private equity managers hand over fist. ... CalPERS is an investor for the long term. We are going to stick with our partners. And that plays right into our strategy of being the investor of choice.
