CalPERS’ board and staff began discussions Tuesday for what will be a three-year process to determine how the nation’s largest defined benefit plan allocates its assets.
When all is completed in the latter part of 2017, it could result in a reshuffling of CalPERS’ assets. The new plan would go into effect in July 2018.
The actual asset allocation process won’t actually begin until next year but the $292.9 billion California Public Employees’ Retirement System, Sacramento, which reviews its asset allocation every three years, is getting an early start.
The pension fund is reviewing its benchmarks and ultimately those benchmarks will influence how assets are allocated, said Eric Baggesen, the pension fund’s senior investment officer for asset allocation and risk management.
Mr. Baggesen told the board and staff at a CalPERS retreat meeting in Monterey, Calif., that one area to be explored is whether to continue to use cap-weighted equity indexes to measure the performance of CalPERS’ equity portfolio. He said if CalPERS continues running strategies against those indexes it stands to lose large amounts of money in a market downturn. However, he said if CalPERS switches to an alternative index measurement it could limit losses in a market downturn, but that would also lessen returns in a robust market environment.
Another discussion Tuesday was CalPERS’ custom private equity benchmark, which is two-thirds of the FTSE U.S. Total Market index, one-third of the FTSE All World ex-U.S. Total Market index, plus 300 basis points. CalPERS investment officers said the index is not investible, making it hard to actually measure CalPERS’ private equity performance.
CalPERS has also underperformed its private equity benchmark for the last five years. For the three years ended Oct. 31, the latest data available, CalPERS’ private equity portfolio had a 13.2% annualized return, 336 basis points below the benchmark; and on a five-year basis, a 17.9% annualized return, 60 basis points below the benchmark.
No formal decision is expected in changing benchmarks until at least 2016.