CalPERS inched closer to potentially adopting a new total portfolio approach with a presentation exploring key risk trade-offs and the board’s ultimate selection of its risk appetite.
Stephen Gilmore, the $533.4 billion pension fund’s chief investment officer, explained that the board and stakeholders would be receiving education sessions on the total portfolio approach leading up to the board’s selection of its risk tolerance in November.
“The aim is to get the board to a position it feels comfortable with a risk appetite for the fund in November,” Gilmore told the investment committee of the California Public Employees’ Retirement System, Sacramento, at its Feb. 18 meeting.
“Once we have that, management will construct a portfolio to go live first of July 2026,” he said.
The board would show its risk appetite by selecting a passive reference portfolio of stocks and bonds with active risk limits, Gilmore told the committee. The active risk limit is a limit on “management’s discretion to pursue value-adding and risk-mitigating strategies, including new asset classes,” according to a staff presentation to the board.
The reference portfolio would exclude alternative asset classes and alpha strategies such as private equity and private real estate, the presentation said. The reference portfolio expresses risk tolerance and does not include the actual or target portfolio positions, it said. The objective of an actual portfolio is to outperform the reference portfolio by using “various investment vehicles and expertise, including additional asset classes and alpha-generating strategies,” the presentation said.
Historically, the investment committee has shown its risk tolerance “through choosing a strategic asset allocation and policy ranges around that (each target allocation),” Gilmore said.
Management would match that risk by assigning equity and bond risk levels to approximate the board’s risk tolerance, Gilmore said. Staff would select the asset class and set the investment rate of return.
“If the board says, OK, we are comfortable with a 70/30 (70% stocks/30% bonds) portfolio, management looks at constructing a portfolio with the same sort of risk and uses weights ... to do that,” Gilmore said.
He added that he would expect the board’s consultants would play a role in validating the weights staff uses “so you can be comfortable that the aggregation gets you to the portfolio risk levels that you are comfortable with.”
To demonstrate how the reference portfolio would work, Gilmore’s team built a series of reference portfolios using mixes of a MSCI ACWI Global Equity–All Size index and Bloomberg U.S. Treasury Total Return Unhedged USD with Maturity 7+ Years index, a CalPERS spokesman said. It showed that expected returns gradually went up as equities increased.
Gilmore said the board at its January meeting appeared to be most comfortable with a 70% equities and 30% bond reference portfolio, which is similar to the risk in CalPERS' current asset allocation.
In March, staff will demonstrate what the portfolio’s performance would be compared with the reference portfolio, he said.
“Some of those asset classes it looks like we have underperformed may look better and some of the ones that appear to have outperformed may look worse,” Gilmore said. “Even though it'll be the same portfolio, the conclusions may be different.”
