CalPERS staff is considering issuing an RFP for enhanced domestic and international equity index strategies that would be allowed to go short with a portion of the portfolio. If the concept is approved by the board of the $193.3 billion California Public Employees' Retirement System, Sacramento, staff will return with an RFP proposal. Billions of dollars likely would be funneled into the strategies, mostly drawn from passive equity portfolios, according to Brad Pacheco, CalPERS spokesman.
Long-short strategies are a cutting-edge investment technique employed by relatively few pension funds. "Allowing a manager to go long or short to equally express both their bullish or bearish views on a security allows for more consistent returns, higher information ratios and the ability to maximize the value of their investment insights," according to a staff memo to the board.
CalPERS would permit managers to go short by no more than 35% of the portfolio while maintaining a portfolio beta near 1.0. The approach "is a good fit for quantitative managers" that already rank all securities in their universe, the memo said. Only a handful of firms have launched such strategies, which typically have between 110% long/10% short and 130% long/30% short, and most rely on simulated track records, the memo noted.
To limit risk, the staff would consider strategies with a tracking error of 6% or less. Staff is also considering using a prime broker in running the program. The size of any potential allocation was not stated.
Separately, CalPERS staff recommended hiring several firms for a pre-approved list of managers to run up to $500 million in environmentally sensitive equity strategies. It recommended AXA Rosenberg, New Amsterdam Partners and Piper Jaffray in conjunction with INTECH to run U.S. equity portfolios; Brandywine to run an international equity strategy; and State Street Global Advisors to run both U.S. and international equity strategies. The environmental investment strategy, which is gaining interest among U.S. and European public funds, stemmed from a proposal by California Treasurer Phil Angelides.
Staff also recommended renewing the contracts for the fund's five international fixed-income managers to run a total of $5.6 billion for a period of one year. A sixth manager, Wellington Management, resigned its portfolio in February 2005, according to a staff memo. The five managers are: Bridgewater Associates and Rogge Global Partners, $1.3 billion each; Julius Baer Investments, $1.1 billion; Baring Asset Management, $1 billion; and Western Asset Management, $924 million.
The CalPERS investment committee will review all the proposals at its Nov. 14 meeting. Wilshire is the consultant.
