CalPERS on Monday adopted a new asset allocation that adds 5% leverage to the entire portfolio, boosts private equity by 5 percentage points to 13% and adds a 5% opportunistic allocation.
The asset allocation which goes into effect on July 1 also increases fixed income and real assets by 2 percentage points each to 30% and 15%, respectively. Reductions came from global equity, cut by 8 percentage points to 42% and liquidity down 1 percentage point to zero.
The leverage and opportunistic allocations are considered separate from the pension fund's target allocation.
Sterling Gunn, a managing investment director at the $495.3 billion California Public Employees' Retirement System, Sacramento, told the investment committee Monday that including leverage as a strategic allocation would "improve the diversification in the portfolio and to help reduce risk."
Mr. Gunn said the staff selected 5% as an upper limit of leverage for now, but that could be increased or reduced in the future.
CalPERS' staff already has the ability to take active leverage, which reflects the deviation of its portfolios to their benchmarks up to 20%, said Dan Bienvenue, acting CIO, in response to a question from outgoing board member Margaret Brown.
"What this (adding 5% leverage to its asset allocation) would do would be to add leverage in to the strategic asset allocation as a diversifier," Mr. Bienvenue said.
At the request of committee member and board President Henry Jones, the staff will bring back an option as part of its implementation plan for the new asset allocation to consider reducing the 20% active leverage to 15%, when the staff adds 5% strategic leverage to the entire portfolio.
Mr. Gunn said the staff reduced its cash allocation to zero in each of the candidate asset mixes presented to the board because "that is our level of confidence in our ability to now manage liquidity."
Mr. Gunn added, "We're always asking ourselves, do we have sufficient liquidity. And the answer is yes. We have lots," including investment in U.S. Treasury bonds.
"So we're fairly confident we don't need to explicitly allocate the cash and incur that drag," Mr. Gunn said.
The investment committee also decided to keep its expected rate of return at 6.8%. In July, CalPERS' 21.3% fiscal-year 2021 returns automatically triggered a reduction of its expected rate of return.
The staff is expected to have a plan to implement the new asset allocation in March.
Separately, following public comment at Monday's investment committee meeting, Theresa Taylor, committee chairwoman, asked the staff to return to the committee after the first of the year with a report on stranded energy assets in CalPERS' portfolio caused by worldwide transition away from fossil fuels as part of the Paris Agreement.
Investment committee member Lisa Middleton asked the staff for a list of all of the renewable energy projects in which CalPERS is invested. At the urging of investment committee member and California Controller Betty T. Yee, Ms. Taylor directed that both reports be made consistent with the Task Force on Climate-related Financial Disclosures framework. The TCFD was created by the Financial Stability Board to standardize reporting on the impacts of climate change.
The staff will also be reporting back to the board about an issue with private equity firm Apollo Global Management's investment in metallurgical coal producer Warrior Met Coal. During the public comment period, Philip Smith, director of communications and government affairs for the United Mine Workers of America said Warrior Met Coal was formed with the assets of another company, Walter Energy. Apollo was a creditor and the creditor group won concessions, including reductions in employee wages, elimination of health-care benefits and elimination of pension plan contributions, Mr. Smith said. The company, which went public in 2017, has paid millions in dividends to Apollo and other investors while refusing "to make up any of the sacrifices the workers made in 2016 that allowed it to come out of bankruptcy," Mr. Smith said.
Hence, the company workers have been on strike for eight months, he added.
