The California Public Employees' Retirement System's investment committee on Sept. 13 will consider changing the $205.5 billion fund's asset classifications, cutting the risk of the fixed-income portfolio by half, and revising its placement agent disclosure policy.
The fund's investment management consultants disagree about the soundness of a revised asset classification that staff will present to trustees of the Sacramento-based fund.
In response to a request by George Diehr, investment committee chairman, for opinions about the classification changes, Santa Monica-based Wilshire Associates Inc.'s Andrew Junkin and Michael C. Schlachter, both consultants and managing directors, wrote in a joint letter that they disagree with the way CalPERS investment staff streamlined asset classifications the committee originally had reviewed in March.
Allan Emkin, consultant and managing director of the system's other consultant, Pension Consulting Alliance Inc., Encino, Calif., on the other hand, expressed support for the revised asset class designations in a separate letter to Mr. Diehr.
The discussion of the revised lineup 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 included in agenda materials, the new asset classification proposes five broad classes: liquidity/hedge, including nominal government bonds and cash; growth, including public equity and private equity; income, including fixed income; real assets, including real estate, infrastructure and timber; and inflation, including inflation-linked bonds and commodities.
The classification scheme presented in March as “an informational item,” according to the memo, was government bonds, including government nominal bonds and government inflation-linked bonds; income, including investment-grade sector bonds, securities lending and credit; growth, including public and private equity, real estate and high-yield bonds; inflation-linked, including infrastructure, forestland and commodities; market neutral, including hedge funds and strategies with low asset-class beta; and liquidity, including high-quality, short-term fixed income.
Since then, further discussion by staff members of the investment strategy group resulted in the new recommendation, the memo said.
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.”
Kim Shepherd, a Wilshire spokeswoman, 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.”
Under a separate agenda item, the investment committee will be asked to approve a change to the global fixed-income investment policy that would reduce the targeted alpha and risk in its $46.6 billion fixed-income portfolio by 50%.
Proposed domestic investment range changes are U.S. Treasury and government-sponsored securities, 10% to 80% of the domestic fixed-income portfolio from zero to 80%; mortgages, 15% to 45% from 10% to 60%; corporate bonds, 10% to 40% from 10% to 50%; opportunistic, zero to 12% from zero to 20%; and sovereign debt, zero to 10% from zero to 15%.
For international weightings, U.S. Treasuries excluding TIPS would remain -10% to 10% of the international fixed-income portfolio; international government bonds would changed to 90% to 100% from 70% to 130%; investment-grade corporate bonds, -10% to 10% from -30% to 30%; mortgages, zero to 10% from zero to 30%; and non-investment-grade corporate bonds, zero to 5% from zero to 10%.
At their Sept. 13 meeting, trustees also will discuss how to change the fund's placement agent disclosure policy to conform to a state bill still under consideration by the Legislature requiring that certain placement agents register as lobbyists. Among other things, the revised policy would redefine “external manager,” in part, as a “person” rather than an “asset management firm” applying to or hired by CalPERS to manage securities or assets for compensation.
Under the revisions, disclosure would apply only to placement agent agreements that include compensation to an agent based on a CalPERS investment.
CalPERS' total fund performance for the quarter ended June 30 was -4.6%. The fund returned 11.4% for the year, annualized -6.1% for the three years and annualized 2.7% from the 10 years, all ended June 30, according to the agenda.
