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.