CalPERS' investment management consultants disagree about the soundness of a revised asset classification system that staff of the $205.5 billion system will present to the fund's investment committee at its Sept. 13 meeting.
In a letter sent to George Diehr, investment committee chairman, Wilshire Associates' Andrew Junkin and Michael C. Schlachter, both consultants and managing directors, said they disagree with the way that investment staff of the Sacramento-based fund streamlined asset classifications that the committee originally reviewed in March.
On the other hand, Allan Emkin, consultant and managing director of the system's other consulting firm, Pension Consulting Alliance, expressed support for the revised asset class designations in a separate letter to Mr. Diehr.
The discussion of the revised lineup for the California Public Employees' Retirement System is in preparation for the investment committee's Nov. 8-9 asset-liability management workshop, where trustees will adopt a new classification system.
CalPERS now classifies assets into global equities, including hedge funds; global fixed income; alternative investments management, including private equity; real estate; and inflation-linked assets.
According to a staff memo prepared for the Sept. 13 investment committee agenda, the new asset classification proposes five broad classes: liquidity/hedge; growth; income; real assets; and inflation.
The classification scheme presented in March as “an informational item,” according to the memo, was government bonds; income; growth; inflation-linked; market neutral; and liquidity. Since then, further discussion by staff members on the investment strategy group resulted in the new proposal, said the memo.
Under the new proposal, hedge funds would not be segregated into a separate asset class, according to the staff memo. Instead, allocations would come from equity and fixed-income allocations, within a risk framework that will be developed later. Under CalPERS' current asset classifications, hedge funds, labeled internally as risk managed absolute-return strategies, are included in global equities.
Messrs. Junkin and Schlachter wrote: “The original intent of the alternative classification system (growth, income, liquidity, etc.) was to define the expected role of various parts of CalPERS' portfolio more clearly. This original alternative categorization system was developed over several months of discussion and was presented to, and tacitly accepted by, the investment committee. The revised system was developed with no input from Wilshire or PCA. … By reducing the number of categories, we feel that much of the benefit of the alternative classification system is now forfeit.”
Wilshire spokeswoman Kim Shepherd replied by e-mail to a request for comment: "The opinion letter from Wilshire covers an ongoing asset allocation process. In it, Wilshire disagreed with a change that staff is making to the “bucket list” CalPERS is using and advised that it believes that the original list was more appropriate.”
CalPERS spokesman Clark McKinley wrote in an e-mail response to a request for reaction: “We don't have a response to the Wilshire letter. Certainly there will be discussion at the investment committee meeting on Monday.”
Mr. Emkin said in his letter that PCA's position is that “the staff's recommendations are the result of a comprehensive and thorough (sometimes contentious) process that included input from the (investment) committee, senior investment staff from all asset classes, consultants and external experts. The recommendations reflect the dynamic nature of the capital markets and the evolution of academic and practioner thought on asset allocation and risk management policy and practice.”