CalPERS may search for long-short enhanced equity index managers and for global fixed-income managers, according to staff recommendations to the $206.1 billion California Public Employees' Retirement System, Sacramento.
The system's investment committee has been discussing adding long-short enhanced index managers since November. While earlier discussions involved both domestic and international approaches, staff is now recommending issuing an RFP for a pre-approved list of domestic equity-only long-short managers.
A test of holdings of an actual 130% long/30% short portfolio "would have little to no effect on total and active risk of the fund, depending on the amount of assets allocated," according to a staff memo. A $2 billion allocation to such strategies would reduce the fund's total risk while increasing active risk, the memo said. A $10 billion allocation, however, would significantly increase active risk for the U.S. equity portfolio, while modestly increasing the overall risk of the total fund. Staff assumes that funding for the portfolios would come from CalPERS' $55 billion internally managed domestic equity portfolio.
Staff recommended hiring a pool of managers with strategies that have low correlations to each other and to other U.S. equity managers employed by the fund. They further urge that the long-short equity managers' alpha engines should produce solid returns on a long-only basis, and that they should have quantitative portfolio construction techniques. No timetable was provided.
Rosalind M. Hewsenian, managing director at consultant Wilshire Associates, dropped previous reservations about the riskiness of the strategy: "We believe that staff fully understands the risks inherent in such a strategy and will take the appropriate steps to mitigate them," she wrote in a letter to Anne Stausboll, interim CIO.
CalPERS staff also recommended issuing an RFP for a pre-approved list of global fixed-income managers. Current managers may not need to apply for the pre-approved list, subject to internal approval. Those managers, who collectively manage $5.3 billion in assets, are: Baring Asset Management, Bridgewater Associates, Julius Baer Investment Management, Rogge Global Partners and Western Asset Management.
Creating a pool of managers will help re-optimize the portfolio in the future, and make it possible to move more quickly by being able to add new managers without issuing a subsequent RFP, a staff memo noted.
Ms. Hewsenian endorsed the RFP but strongly urged that evaluations of candidates be held in closed sessions "so that the investment committee can receive frank evaluations without fear that it will be picked up by the press." Managers are less likely to bid on the contracts if Wilshire's evaluations are made public, she explained.
An RFP is expected to be issued this month, with selections expected to be proposed in June.
Separately, California state Controller Steve Westly urged the CalPERS board to press companies to take back merit-based executive pay awarded on the basis of misstated or fraudulent company performance. In a Jan. 31 letter to CalPERS board members, Mr. Westly asked the board to propose and support proxy proposals urging companies to include "clawback" proposals in executive contracts. Mr. Westly also said he will request the board to endorse "Protection Against Executive Compensation Abuse Act," sponsored by Rep. Barney Frank, D-Mass., which would require improved disclosure of executive pay and mandate the return of performance-based pay in the event that earnings are restated or are fraudulent.
Mr. Westly is expected to raise the issue at the Feb. 14 CalPERS investment committee meeting.