CalPERS boosts staff's investment authority, checks crypto

The largest U.S. pension fund was busy at its November meeting, giving investment staff more leeway to invest in private assets.

Other items of note during its three days of meetings: CalPERS CEO Marcie Frost decried the politicization of ESG investing and also said the pension fund is examining its exposure to cryptocurrencies in its private equity portfolio.

CalPERS' investment committee on Nov. 14 changed its investment policy regarding staff investing in private assets, including an increase in the amount certain staff members can invest without board approval.

Nicole Musicco, chief investment officer for the $443.2 billion California Public Employees' Retirement System, Sacramento, said staff needed the changes so the investment team could be "set up to be agile" and responsive to market conditions. Staff wanted to "really make sure we have the appropriate tools in place to execute on the strategic asset allocation that we endeavored starting in July," she said.

Staff members are implementing its new asset allocation amid what she expects to be "continued rocky roads through the next 12 to 18 months," Ms. Musicco said.

Among the changes in the investment policy statement approved Nov. 14 are raises to the CIO's commitment and disposition limits in infrastructure to $6 billion from $2 billion, and the managing investment director's commitment and disposition limit to $2 billion from $1 billion. The policy leaves the CIO and managing investment director's real estate commitment and disposition levels unchanged at $6 billion and $3 billion, respectively.

The revised policy also, for the first time, includes commitment and disposition limits for the deputy CIO at $4.5 billion for real estate and $4 billion for infrastructure. In addition, prudent person opinions are required only for transactions that are greater than $250 million, up from $100 million for both the CIO and managing investment director investment decisions.

The policy also increases the infrastructure portfolio's exposure to international infrastructure to 70% from 60% of the portfolio's net asset value and reduces its allowable exposure to U.S. infrastructure to 30% from 40%.

In private equity, the revised policy increases staff's delegated authority size for funds, customized investment accounts, co-investments and secondary purchases. The CIO can now commit $4 billion to a customized investment account, up from $1.9 billion; $3 billion to a fund, up from $1 billion; $3 billion for secondary market purchases, up from $1.7 billion; and $1.5 billion for a co-investment, up from $600 million. The investment committee added a new category, secondary sales, with limits of $6 billion for the CIO, $4 billion for the deputy CIO and $2 billion for the managing investment director.

The investment policy also increases the aggregate commitment size to a single general partner to 15% from 10% of its total net committed capital to private equity. Any exceptions must be approved by the investment committee. In 2014, the committee increased approved exceptions, increasing the aggregate amount to 15% for three managers, Blackstone Inc., Carlyle Group Inc. and Apollo Global Management Inc. CalPERS had $72.3 billion in real assets and $48.8 billion in private equity as of Sept. 30.

Staff will keep the committee "up to speed" on its investments and get the committee's feedback, Ms. Musicco said.

"We don't want anyone to be surprised on anything we are doing, and we need the board's full support on some of the needle-moving transactions we are looking at," Ms. Musicco added.

She said more details would be provided in closed session.

Meanwhile, at the board's Nov. 16 meeting, Ms. Frost decried the politicization of environmental, governance and social investing and highlighted the benefits of the $443.2 billion pension plan's ESG approach.

"In some cases, the (midterm election) campaign rhetoric not only dismissed the danger of climate change, it went so far as to mischaracterize a strategy we believe in strongly: examining the risk factors of the environment, of social inequality and of good governance," Ms. Frost said. "The falsehoods about ESG risk analysis have been so widespread that I even heard them repeated during our Educational Forum" (in Anaheim, Calif., Nov. 1-3.)

The result of CalPERS' strategy is that it has reduced the carbon intensity of its global equity portfolio by more than 30% and its global fixed-income portfolio by more than 50% over the past seven years, she said, citing a climate report shared with the investment committee on Nov. 14.

CalPERS' ESG approach has also produced investment opportunities, including about $19 billion in global equity and about $1 billion of its corporate credit portfolio, she said. And roughly 51% of its infrastructure portfolio is invested in renewable energy, energy-efficient infrastructure, sustainability-certified and carbon-neutral assets, Ms. Frost said.

"But let's be clear: Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology," she said. "Those who say otherwise are actually advocating for investors like CalPERS to put on blinders ... to ignore information and data that might otherwise help build on the retirement security of our 2 million members."

Ms. Frost also noted CalPERS' work in diversity equity and inclusion in farewell comments for outgoing board member Betty Yee, California state controller who helped with the development of a diversity equity and inclusion framework and CalPERS diversity forums.

Indeed, in the first six months of 2022, CalPERS committed or invested $481 million with seven emerging managers and $3.2 billion with 12 diverse managers, according to the pension plan's first Diversity in the Management of Investments Report, which was approved at the Nov. 14 investment committee meeting. The report was mandated by a new California law signed by Gov. Gavin Newsom in October 2021 to promote the inclusion of more women and minority-owned money managers in the asset management industry. Both categories included investments made directly and via funds of funds, the report said.

The Legislature decided to require the reports from CalPERS and the $297.6 billion California State Teachers' Retirement System, West Sacramento, "after determining CalPERS and CalSTRS may have room to improve" when it comes to investing with women-and minority-owned money managers, said James Andrus, investment manager for financial markets, who has been serving as interim managing investment director for board governance and sustainability since January.

"We believe organizational cultures promoting diversity are vital to improving the long-term performance of our organization as well as the businesses and markets in which we invest."

Some committee members were displeased with CalPERS' progress.

"It helps us see we have a lot of work to do in this area," said Theresa Taylor, investment committee member and board president. "And after 30 years, it is apparent that while we used to be in the forefront in our emerging manager program, I don't think we are there anymore."

Ms. Frost also said CalPERS is investigating its exposure to cryptocurrencies in its private equity portfolio.

While CalPERS does not have direct investments in cryptocurrencies, "there are likely indirect exposures that includes public index holdings," such as in cryptocurrency exchange Coinbase Global, Ms. Frost said at Nov. 16's board meeting.

CalPERS officials declined to provide further information. According to an SEC filing, CalPERS owned 319,037 shares of Coinbase as of Nov. 9.

CalPERS' SEC filing also reveals indirect cryptocurrency exposure with investments in Tesla, and software and cloud services firm MicroStrategy.

As of Nov. 9, CalPERS owned 5,738,492 shares of Tesla worth $1.5 billion, the SEC filing said. Tesla had $218 million as digital assets on its balance sheet as of Sept. 30, according to its most recent 10-Q filed with the SEC on Oct. 24. Tesla acknowledged that its profitability is affected by its digital asset holdings, saying that any impairment charges "may negatively impact our profitability in the periods in which such impairments occur even if the overall market values of these assets increase."

CalPERS owned 20,029 shares of MicroStrategy worth $4.3 million as of Nov. 9. MicroStrategy owned $2 billion of bitcoin as of Sept. 30, its Nov. 1 10-Q shows.

"Fluctuations in the price of bitcoin have in the past and are likely to continue to influence our financial results and the market price of our class A common stock," MicroStrategy said in the SEC filing.