CalPERS CIO Yu "Ben" Meng has been conducting a slow-moving campaign to boost the $386.9 billion pension plan's returns by centralizing management and making comparatively revolutionary changes to the fund's governance along the way, adding the ability to leverage the entire fund up to 20%.
Use of leverage has attracted a lot of attention for the California Public Employees' Retirement System, Sacramento, after its investment committee signed off on that in September. The new leverage limit is another step in CalPERS' move since the financial crisis to govern the plan as a whole, rather than each asset class operating independently with its own leverage limit and leverage definition.
Currently, the Sacramento-based pension plan has 4% to 5% leverage, Mr. Meng said. In September, the plan had less than 10% leverage.
"We don't plan to leverage to 20%," Mr. Meng said in an interview. "We will deploy leverage gradually, prudently and opportunistically."
He called the 20% limit "moderate" leverage that is needed to offset lower return expectations; CalPERS currently has a 7% expected rate of return.
Before the 20% total fund limit was set, the leverage allowed in each asset class totaled about 23%.
However, not all leverage is counted as such. Leverage in both capital commitments and direct debt are considered as contingent liabilities, according to CalPERS' investment policy. And leverage in currency derivatives used for hedging or risk management purposes likewise isn't counted as leverage.
The 20% total fund leverage limit applies to the total leverage in which staff exercises direct control of the exposure. Direct control means leverage where staff has authority over a manager or limited partnership's use of leverage or staff applies debt to in-house portfolios.
"If you can't control it, you can't manage it," said Eric Baggesen, CalPERS managing investment director, trust level portfolio management, in a separate interview.