CalPERS eventually might invest up to $6 billion in commodity futures, its first allocation to the asset class, a staff memo suggests. Officials at the $207.1 billion California Public Employees' Retirement System, Sacramento, plan to submit a recommendation for a pilot program to the investment committee at its April 17 meeting. In the meantime, staff will present an educational session on commodity futures at the March 13 investment committee meeting. Materials for that meeting say commodity futures perform well in inflationary periods, would protect the retirement system's funding ratio and help with asset-liability matching.
Commodity futures also provide significant diversification from equities and bonds and offer positive returns. CalPERS staff forecasts the annual return of 6.5%, while consultant Wilshire Associates Inc. projects a 5.5% annual return. The difference is that CalPERS staff expects Treasury bills will generate an additional one percentage point above inflation.
Staff believes that allocating 3% of total fund assets, taken from both global equities and fixed income, would have no effect on the pension fund's total return while reducing total risk by 31 basis points.
Separately, CalPERS staff is developing a plan to create active currency programs designed to add alpha that would be run by both internal staff and external managers, according to a presentation to be given at the March 13 meeting. Staff plans to bring a proposal to the investment committee to create internal capability and to search for external managers in 2007. CalPERS' current currency overlay managers, who invest defensively, would not be affected by any proposed changes.