CalPERS' investment consultant, Wilshire Associates, said the system's new risk-based capital allocation model could hurt the corporate governance practices it is in the process of integrating into investment decisions.
Wilshire said in a report prepared for the Dec. 13 investment committee meeting that the $226.6 billion Sacramento-based California Public Employees' Retirement System's corporate governance investment program could not be integrated easily into the asset allocation scheme's risk model because the program is highly concentrated with a high level of volatility.
“Given the concentrated nature of the portfolios in the corporate governance investment program and the resulting volatility, the capital allocation model would choose to eliminate each of the corporate governance investment program's managers, despite the significant value added by the program over the long term ,” the report said.
Another issue, Wilshire said, is how best to benchmark the external managers in the corporate governance program. “As each manager has a concentrated portfolio, sector concentration is inevitable. As a result, performance relative to a broad benchmark could simply be a function of the manager's sector weights, rather than any investment skill or activism impacts.”
Wilshire also said the system's activism could be less effective in emerging markets investments because there may be fewer managers qualified to make proper investments.
CalPERS is looking for better ways to model opportunities and performance in corporate governance mandates, Clark McKinley, CalPERS spokesman said in a statement. “The board remains fully committed to its corporate governance strategy,” he said.
Wilshire spokeswoman Kim Shepherd said the firm would have no comment on its report.