CalPERS’ investment committee on Tuesday approved the outline of a plan that would expand the system’s risk portfolio by increasing its public equity exposure to 53.1% of total assets from 49.1% and raising its infrastructure allocation to 3% from 1%.
Funding would come from its U.S. Treasuries portfolio and other low-risk investments.
The outline is part of the committee’s efforts to change the $220.1 billion Sacramento-based California Public Employees’ Retirement System’s asset allocation for the next three years, starting in 2011.
Investment staff presented the committee with eight investment portfolios ranging from conservative bond-centric with a low return rate to the public equity increase, which had the highest rate of return and the highest risk level. George Diehr, committee chairman, stressed that a final decision could be based on a combination of CalPERS’ current risk portfolio with elements of higher-risk portfolios. That decision is expected at its December meeting.
Mr. Diehr said the higher level of risk was necessary to avoid large increases in contributions to CalPERS from state agencies and public safety departments. Even with the riskiest of the eight portfolios selected, the highest rate of return estimated by CalPERS’ investment staff would be an annualized 7.49%, below the current 7.75% assumed rate of return. Under that scenario, state agencies would be required to increase employer contributions 1.5 percentage points to 3 percentage points, and increase contributions for public safety agencies 3 percentage points and 5 percentage points.
The ultimate employer contribution rates chosen by the system will be based on CalPERS’ discount rate, which is expected to be set by the CalPERS board at its February meeting. Joe Dear, CalPERS chief investment officer, said generally the discount rate and the assumed rate of return are the same.
At Tuesday’s committee meeting, Michael Schlachter, managing director of Wilshire Associates, the system’s investment consultant, warned that the equity-heavy portfolio they had chosen would do well only if there were economic growth. Mr. Diehr acknowledged Mr. Schlachter’s concerns but said he felt that the CalPERS investment staff could find equity opportunities among frontier economies in which they had not previously made investments.
The fund on Tuesday also reported a final net return of 13.3% for the year ended June 30 — almost two percentage points higher than its preliminary return estimate of 11.4% released in August.
“This updated report indicates a gain of more than $40 billion since our turnaround from the lowest point of the recession in March 2009,” Mr. Dear said in a news release. “We also beat our benchmark of 12.95% and eclipsed return targets for every asset class except real estate. But even that asset class improved dramatically over what we reported in July.”
The net return exceeded the system’s long-term annualized earnings target of 7.75%, bringing the 20-year return average through June 30 to 7.65%.
Global fixed income returned 20.35%; private equity, 23.88%; public equities, 14.42%; and commodities, infrastructure, forestland and inflation-linked bonds returned a combined 8.7%. Real estate assets returned -10.76%; the system in July had estimated a -37.1% return for real estate.
“These figures confirm our initial assessment a few months ago that we were in a recovery mode with the opportunity to capture future returns because of our long-term investment horizon,” Mr. Dear said in the release. “These financial figures are good news for employers since investment gains will help mitigate increases in their contribution rates.”