CalPERS' investment committee on Monday approved a new framework for allocating its assets, combining public and private equities into a new growth classification and moving Treasuries into a new liquidity category.
Also, two new classifications were created: Real assets will now include infrastructure, forestland and real estate, and inflation-linked assets will include commodities, TIPS and inflation-linked bonds. The fixed-income category will remain unchanged.
Allocations at the $220.1 billion California Public Employees' Retirement System, Sacramento, currently are divided into fixed income, public equities, private equity, real estate, inflation-linked assets and cash.
The growth allocation will be 63% of total assets; fixed income, 16%; real assets, 13%; and inflation-linked and liquidity, which will also include cash, 4% each. Under the previous classification, public equity was 49%; fixed income, 20%; private equity, 14%; real estate, 10%, inflation-linked assets, 5%; and cash, 2%.
Joseph Dear, CalPERS chief investment officer, said at the meeting the new classification scheme will allow CalPERS to use a risk-based approach to asset allocation, giving board members a fuller sense of the myriad portfolio risks they are assuming. The new framework creates a way to diversify across macro-risk and economic conditions and also creates a framework for hedging portfolios (for liability and inflation) should that approach be taken in the future.
Mr. Dear said the new categories would also create a framework for CalPERS to engage in dynamic strategic allocation, such as the annual review of its asset allocation, as opposed to the current three-year cycle. He also said it would allow the system to use a leveraged bond strategy should that be considered in the future.
Because CalPERS' portfolio faces risk from periods of low growth or high inflation, Mr. Dear added, the new risk system should enable CalPERS investment staff to better analyze portfolio risk depending on specific economic environment.
A formal vote on the new classifications will be made by the full board at its December meeting.