CalPERS ponders taking more equities in-house

An expected August vote by the $254.9 billion California Public Employees' Retirement System could accelerate moves to manage more of the pension fund's $131 billion equity portfolio in-house, reducing its reliance on outside managers.

CalPERS already internally manages 83% of its equity portfolio, a percentage that has increased over the years, but approximately $22 billion is still managed by external managers.

The move is being considered as part of a larger review of investment beliefs at the nation's largest retirement system, a process that not only could eventually reduce the number of active equity managers Sacramento-based CalPERS employs, but also reduce the fund's allocations to real estate and private equity.

The review is scheduled for a vote at CalPERS' Aug. 19 investment committee meeting.

Regardless of the vote, massive changes to investments won't follow immediately, said Janine Guillot, CalPERS' chief operating investment officer, in an interview.

A vote, for example, stating that passive management is better than active wouldn't necessarily mean CalPERS would forgo active managers, said Ms. Guillot.

She said it would be a philosophy that would guide the system instead of an edict written in stone.

Eighty-three percent of CalPERS' $131 billion equity portfolio is already internally managed in seven passive index and two non-cap-weighted smart-beta strategies.

CalPERS also manages more than 93% of its fixed-income portfolio internally in active portfolios and has been gradually increasing that allocation.

Ms. Guillot would not address directly the question of whether CalPERS could eventually manage all or almost all of its equity portfolio internally.

“We are going through a thoughtful process to determine our investment process, and it's too early to draw a conclusion,” she said.

But Ms Guillot does not see a day where CalPERS' overall portfolio would be entirely internally managed. She said certain asset classes, such as real estate and private equity, require on-the-ground expertise of external managers in those areas.

She did, say, however, that the review could help determine the appropriate level of investments in private equity and real estate, looking at such issues as how fees for outside managers in those asset classes affect the pension system's returns.

Ms. Guillot said the investment committee could determine different investment beliefs for different asset classes.

Board member J.J. Jelincic said that as part of the upcoming investment beliefs vote, the board is discussing whether real estate and private equity investments are effective given the large fees paid and the multiyear capital lockup that is necessary for investments in those areas.

Ms. Guillot said that CalPERS spends approximately $1 billion a year on external manager fees. Increasing internal management capabilities has been a constant discussion topic at CalPERS investment committee meetings, as the board and staff look at how it can reduce fees paid.

Ms. Guillot said she is preparing a detailed analysis of manager fees for an April meeting as part of the on-going discussion.

On the equity front, once fees are taken into consideration, CalPERS' passive equity index strategies have outperformed outside managers on both a five- and 10-year basis, said Mr. Jelincic.

One issue being explored by the board, said Mr. Jelincic, is whether CalPERS could launch its own active management strategies to save fees. He said CalPERS would need to hire additional investment personnel to run such strategies.

Mr. Guillot stressed no decision has been made on the issue.

She said the issue is not whether a particular equity manager can outperform over time, but whether the results of outperforming managers are cancelled out by underperforming managers.

“We need to know what's right for the entire portfolio,” she said. “You can't look at a single manager.”