CalPERS announced Monday it is reviewing its entire divestment program, including tobacco, over the next 12 to 24 months, and also adopting a new strategic plan for its real assets program, creating new parameters for the overall risk assets program in such areas as risk and region.
The board of the $293.6 billion California Public Employees’ Retirement System, Sacramento, plans to consider reinvestment in tobacco following an October report from investment consultant Wilshire Associates that revealed CalPERS had lost $3 billion due to its divestment from tobacco, as of Dec. 31, 2014, and about $8 billion total from all its divestments.
"Divestment as an investment strategy presents a challenging conflict for CalPERS, as it often pits social responsibility against our fiduciary duty as outlined in the California Constitution," said Henry Jones, chairman of the CalPERS investment committee and board vice president, in a news release. "As a California public agency, we are sensitive to the policy issues surrounding divestment causes. But we’re also obligated to ensure that we maximize our investment returns on behalf of our members. We now have a clear path forward."
The news release said the board’s review of its divestment programs, followed by decisions on how to move forward, should be complete by early 2018.
The new real assets parameters, meanwhile, are intended to reduce risk, costs and complexity of CalPERS’ real assets program, which consists of real estate, infrastructure and forestland. Previously, each individual asset class had its own parameters.
The overall target for real assets is 13%. Real estate takes up 10% of the total; infrastructure, 2%; and forestland, 1%.
The overall risk parameter for real assets establishes that between 75% and 100% of the overall real assets program go into core investments, a range of zero to 25% each for opportunistic and value-added investments, and a range of zero to 10% for development (build-to-core) strategies.
Overall regional parameters are 70% to 100% U.S., zero to 30% international developed markets, zero to 15% international emerging markets, and zero to 15% international frontier markets.
“This strategic plan builds on the tremendous work done to rebuild the program after the mortgage meltdown and financial crisis,” said Mr. Jones in a separate news release. “Real assets is a vital part of the CalPERS portfolio, and this plan will keep it on the right track for the next five years.”
Other parameters that were established for real assets include a target limit of 25 external managers, leverage parameters of a 55% loan to value ratio and 1.4 debt service coverage ratio and a separation of segments into essential, commercial, consumer, residential, specialized and international.
The new plan also creates a pilot real estate program that would implement unlevered real estate partnership mandates, allowing those external managers to focus on unlevered performance. Details and an implementation timeline have yet to be determined.
Other items up for review in 2017 are the role of the forestland program, as well as the overall allocation and benchmarks.