CalPERS staff recommended investing $500 million in an internally managed pilot commodities program. The program would be in a diversified portfolio that would be fully collateralized. Its main objective would be to add diversification to the $221.3 billion California Public Employees' Retirement System's total portfolio, while meeting or beating an unspecified commodity futures index after fees.
Michael C. Schlachter, managing director at Wilshire Associates, supported the project with certain caveats. He noted that "commodities often decline as equity markets rise," that the program should not be expanded until CalPERS completes its November 2007 asset allocation study, and that using Treasury inflation-protected securities as collateral, rather than short-term funds, would increased the program's duration risk.
Mr. Schlachter also supported two other commodities programs CalPERS is considering. One would hedge individual projects, such as using energy futures to lock in gains from an investment in a solar electricity generation projection. Another would invest in a commodities-based absolute return strategy.
Separately, CalPERS staff recommended renewing contracts for its five international fixed income managers for a one-year period ended Aug. 30, 2007. The managers are: Rogge Global Partners, which runs $1.7 billion; Western Asset Management, $1.4 billion; Julius Baer and Bridgewater, $1.3 billion each; and Baring Asset Management, $996 million.
Andrew Junkin, managing director of Wilshire Associates, favored the contract extensions but said the staff is watching Baring and Julius Baer for performance reasons. Gina Solomon, senior vice president at Baring, said the firm does not comment on individual clients. Doug Doucette, senior vice president at Julius Baer, did not respond to a request for comment.
The CalPERS investment committee will review the commodities program and international fixed-income managers at its Nov. 13 meeting.
Elsewhere, CalPERS staff committed $500 million to KKR 2006 Fund, which is expected to close with $15.5 billion in commitments. Staff also made an initial contribution of $75 million to ERAAM Highbury Fund, a European hedge fund of funds.