Officials at the $226.5 billion California Public Employees' Retirement System, Sacramento, are using a new risk management system and attempting to beef up investment staffing as they continue efforts to better protect the pension fund from another financial meltdown.
The new risk system, BarraOne, allows CalPERS to compare holdings of hundreds of the pension fund's private equity partners with CalPERS' own public equity portfolio to see, for example, if there is overconcentration in a particular sector, said Janine Guillot, CalPERS chief operating investment officer.
“Let's say we ended up with a large concentration in some consumer sector in private equity,” she said. “We could choose to alter the mix of our public equity portfolio to bring down that concentration if we wanted to, but historically we wouldn't have even known that.”
Ms. Guillot said the new analysis between and among asset classes is essential given CalPERS' huge exposures. As of Jan. 30, the pension fund had $113.6 billion in public equities. Private equity totaled $33.9 billion and real estate assets totaled $19.2 billion as of Oct. 31, the latest period for which data were available.
Ms. Guillot said the new system also will enable CalPERS to compare the portfolio risk of its real estate holdings to the entire CalPERS portfolio. Previously, she said, CalPERS could only analyze real estate risk in isolation.
The value of CalPERS' investment portfolio dropped around 25% in the fiscal year that ended June 30, 2009, convincing the CalPERS board that the system needed to enhance its risk capabilities.
Changes over the past two years have included creating a risk management office, cutting fees of external investment managers and allowing investment teams to break out of their silos to collaborate with each other to better seize investment opportunities, said Ms. Guillot.
“We learned from the financial crisis that we needed a sharper focus on how our investments were reacting to what's going on in the economy,” Rob Feckner, CalPERS board president, said in a statement. “That's the real benefit of the risk-based approach we adopted. We have a much clearer view now of what's driving returns, and that means we can better anticipate performance. We're focused on risk to protect the portfolio.”
The changes included the hiring of Ms. Guillot. The former managing director and chief operating officer for Barclays Global Investors joined CalPERS in April 2010 and was given responsibility for the investment office's administrative functions.
After only about a month on the job, CalPERS got a big black eye. Former board member Alfred Villalobos, who had become a placement agent representing private equity and investment firms seeking CalPERS contracts, and former CalPERS CEO Fred Buenrostro were indicted by a state grand jury on fraud changes as part of an influence-peddling scandal.
Other CalPERS officials were lavishly entertained in exchange for helping Mr. Villalobos' clients win investment contracts, according to court documents. The scandal resulted in an overhaul of ethics, gift and travel rules.
But Ms. Guillot believes the story of CalPERS' transformation has been overshadowed by the scandal. “We're really trying to be a credible fund leader again after everything we've been through,” she said.