Asset owners need a different set of tools to navigate their portfolios through the uncharted waters they find themselves in today, said Betty T. Yee, outgoing California state controller and member of the boards of CalPERS and CalSTRS.
To get there, boards need more education related to these issues and risks including geopolitical and climate change, and to hire staff with different skill sets to augment the deep investment expertise plans already require.
"How do we best fulfill our fiduciary duty in a world where there is more geopolitical risk, in a world where the climate is changing?" said Ms. Yee, who on Jan. 2 will end her eight years as controller, which gave her seats on the boards of the two largest public pension plans in the nation: the $444.1 billion California Public Employees' Retirement System, Sacramento, and the $297.6 billion California State Teachers' Retirement System, West Sacramento.
After a 38-year career that included two terms as California state controller, during which time she also chaired the California Franchise Tax Board and the California Lands Commission, Ms. Yee said she plans to take a break. However, Ms. Yee's vision of taking a rest includes maintaining her seat on the board of Ceres, a non-profit organization that works to make the financial business case for sustainability to capital market leaders.
As she leaves her position on the boards of CalPERS and CalSTRS, having served two terms for each plan, she said that running the pension funds the way they have always been run will no longer work in light of the new hazards of climate change, the war in Ukraine and the impact of an ascending China on the world stage.
"It's getting harder and harder to be a fiduciary when there are these new risks," Ms. Yee said.
In light of this, both funds are doing the best they can to assess their risk tolerances and translate those into what they believe as investors, she said. "CalSTRS is doing a good job and is pretty disciplined in looking at all this," Ms. Yee said.
Part of this is the risk budgeting approach CalSTRS has been taking and "CalPERS is following suit," she said. CalSTRS has been incorporating a risk budget since 2020 when the board. Between 2020 and 2021, CalSTRS adopted risk budgets for its public market strategies — global equities, fixed income, and sustainable investment and stewardship strategies — to allow staff flexibility to invest among asset categories within public market asset classes.
But, she suggested that the CalPERS board "does have to be more involved in setting strategy, short-term and long-term," and not only through the important process of selecting a strategic asset allocation. "The (CalPERS) board has to dig in and become more in tune with all the externalities that could impact the fund," Ms. Yee said. "We need more frequent investment committee meetings, (and) board education looking at geopolitical risk."
CalPERS has scheduled four investment committee meetings for 2023. CalSTRS schedules its meetings on a fiscal year basis and has six investment committee meetings scheduled for fiscal year 2023. These schedules do not include one board off-site meeting each pension fund has scheduled for next year and fiscal year, respectively, nor does it include a board education day CalPERS has scheduled for Jan. 17.
"The (CalPERS) board needs to be more plugged in, more knowledgeable about what may come at us," Ms. Yee said. "I'd like to see the investment committee carve out time for board education related to some of these issues and some of these risks."
And the CalPERS board should be working more in partnership with other institutional investors to try to share best practices as all asset owners face risks and possible investment opportunities that they have not seen before — particularly with one another.
Both CalPERS and CalSTRS are approaching the task of investing in a challenging environment differently and officials at each plan should be more attuned to what the other plan is doing, she said. For example, to the extent both pension funds are placing an emphasis on investing in private asset classes, more attention should be paid on the differing approaches each is taking, Ms. Yee said.