CalPERS is expected to formalize plans next month to bring in-house about $500 million of its $3.6 billion in international fixed income, part of a continuing effort to expand internal money management at the nation's largest pension fund.
In addition, officials at the $235.2 billion California Public Employees' Retirement System, Sacramento, are looking to gradually expand how much is managed internally in emerging markets equities, Janine Guillot, CalPERS chief operating investment officer, said in an interview.
The possible emerging markets move comes amid a larger debate over how much of CalPERS' public equity assets should be managed externally.
CalPERS already manages more than 93% of its $110.1 billion in fixed income and 83% of its $114.5 billion in public equities in-house. With internal passive management generally outperforming external active management over the past five years, said board member J.J. Jelincic, “it doesn't make any sense to continue paying fees for underperformance.”
CalPERS data back up Mr. Jelincic's point. CalPERS' nine internally managed domestic equity strategies, seven passive and two active, with a total of $43.7 billion in assets, outperformed the five external domestic traditional equity managers — Boston Co. Asset Management LLC, First Quadrant LP, J.P. Morgan Asset Management, Pzena Investment Management and T. Rowe Price Group Inc., managing an aggregate $3 billion in assets — for the one, three and five years ended Dec. 31.
For the year, the combined CalPERS portfolios returned 0.66% vs. -1.18% for the five managers. For the three years, the CalPERS portfolio showed a gain of 15.17%, while the managers returned 13.32%. For the five years, CalPERS had 0.34% compared with -1.71% for the managers. Multiyear returns are compound annualized.
Ms. Guillot said a full review addressing some of Mr. Jelincic's concerns will start this summer. It will look at how CalPERS selects external equity managers and examine their performance. She said the review could take one to two years. “We need to determine who has the proven ability over time to generate returns,” she said.
Ms. Guillot said that although Mr. Jelincic was correct on recent performance, that didn't mean those external managers won't outperform in the future.
On the fixed-income side, international, high yield and part of a currency overlay strategy are the last to move in-house. About $650 million in high-yield bonds was managed externally as of Dec. 31, less than half of what was run internally.
“We have always outsourced certain specialty mandates — high-yield fixed income, international,” Ms. Guillot said. “We look to bring them internally over time as we build the skills.”