CalPERS officials plan to “gradually increase” the $519.9 billion pension fund’s exposure to private markets to its new 40% target allocation from its actual investment of 30% as of June 30, said Stephen Gilmore, the new CIO at a Sept. 16 investment committee meeting.
The California Public Employees’ Retirement System, Sacramento, adopted the new allocation in March, four months before Gilmore joined as CIO. The allocation increased private markets exposure to 40% from its former 33% target. The increased allocation was by boosting private equity by 4 percentage points to 17% and private debt by 3 percentage points to 8% at the expense of public equity and public fixed income.
Increasing CalPERS private markets exposure will give the fund a wider range of the investable markets but less liquidity, he said.
Gilmore also said that one of CalPERS' relative advantage in the private markets is because it had made fewer commitments than its peers.
“And that actually gives us an opportunity to get access to high quality funds and maybe to negotiate better terms and conditions,” he said.
Gilmore speaks about returns
During a presentation, Gilmore spoke about the pension fund’s fiscal year returns which fell below its benchmark for the one, 10 and 20-year periods ended June 30.
He said that the reason for the underperformance, 9.3% for the year ended June 30 below its 10.3% benchmark, was that private equity was no match for the “very strong performance of the equity market... where you've seen the large cap tech stocks do phenomenally well and you'll find a lot of our peers and others lag benchmarks because of that.”
Private equity underperformed its public market benchmark in all time periods including the 10 and 20-year periods ending June 30 with a net annualized 11% compared to its 11.6% benchmark and net annualized 12.1% vs 13.5% benchmark.
“I expect that (private equity) will recover somewhat over time,” Gilmore said. “We’ve already seen that with the large tech stocks giving up some ground.”
CalPERS is continuing to expand its exposure to active investments with a net $17 billion of new asset deployments across public strategies.
Active management requires patience, said Simiso Nzima, managing investment director, global equity at the investment committee meeting.
“No investment strategy can outperform its benchmark every day or every week or every month or even every year,” Nzima said. “A long investment horizon is required to actually reap those benefits from active management.”
Ali Kazemi, a managing director at Wilshire, CalPERS’ general investment consultant, said at the meeting that the pension fund’s lower-than-expected return could also be explained by its 10 percentage point gap between its actual and target private markets allocation. But he said that pension officials “continue to build into those positions, again, that 8% target to private credit being the biggest driver of that gap.”
In the fiscal year, CalPERS committed $28 billion to private markets.
Kazemi also noted during his presentation that CalPERS’ CIO turnover has had an impact on the fund.
Gilmore succeeded Nicole Musicco, who left CalPERS in September 2023, becoming the second consecutive CIO to leave after only 18 months on the job.
“We think it's fair to say that some degree of a lack of continuity from a strategic standpoint, including turnover at the CIO level has impacted the ability for the team to implement a portfolio strategy in a consistent manner, so that's something to point out,” Kazemi said.
