CalPERS is attempting to increase allocations to infrastructure investments and timber, assembling what is believed to be the largest infrastructure investment staff among U.S. pension funds.
For the $277.3 billion, Sacramento-based California Public Employees' Retirement System, expanding investments in both areas is part of a continuing effort to diversify assets, serve as an inflation hedge and provide a cash yield for the pension fund.
The initial infrastructure investments were made after the financial crisis, when executives searched for investments not correlated to plunging stocks and bonds.
CalPERS had purchased and sold some timber assets (which officials of the pension fund call forestland) before the financial crisis, but made new investments as part of the asset diversification effort in 2008. However, CalPERS executives have not made any new forestland investments in five years and instead have put more focus on increasing infrastructure assets.
The fund has more than doubled its infrastructure investment team in the past 15 months to 13 staff members. Randall Mullan, the retirement system's senior portfolio manager, infrastructure and forestland group, said in an interview that he knew of no other pension plan in the U.S. with such a large infrastructure staff. It is a point backed up by several consultants.
But the infrastructure team is still struggling to find suitable investments. CalPERS made more than $930 million in infrastructure investments in the year ended June 30. Still, total infrastructure investments stand around $1.4 billion, or 0.4% of total assets; CalPERS has a target of 2%.
As the pension fund added infrastructure staff, it has seen additional competition for those investments, said Mr. Mullan. He said the low-interest-rate environment has pushed institutional investors toward infrastructure and other alternative investments.
“So you're seeing new allocations to infrastructure popping up all the time, either in pension funds or with various insurance companies around the globe,” he said.
In addition to intense competition, CalPERS has had difficulty finding projects that would meet its target of 7% annually, Mr. Mullan said. He said of 129 projects CalPERS examined in the 12 months ended March 31, only three were funded.
CalPERS wants to commit another $2 billion to infrastructure before the end of its fiscal year June 30, said Mr. Mullan. That would bring the retirement system's infrastructure assets to about 1%.
He said the new team is aiming for direct and separate account investments because fees are lower than in infrastructure funds and CalPERS has control of the investments. He said performance generally has been better than in infrastructure funds in which CalPERS is a limited partner.
The majority of CalPERS infrastructure investments, 55%, are in funds; Mr. Mullan said CalPERS would like separate accounts and direct investments to predominate instead.
He said his expanded infrastructure team, with expertise in transportation and power projects, is looking at power plants, airports, parking facilities and toll roads as potential investments.
Plans for expansion of the fund's forestland investments are not as advanced. CalPERS has $2.2 billion invested in timber, just two-tenths off its 1% allocation.
While infrastructure has produced overall robust returns — an annualized 18.9% for the three years ended June 30 compared to its custom benchmark of 6.7% — timber has fared poorly, producing an annualized -2.8% vs. 3.6% for the benchmark NCREIF Timberland index during the same period.