CalPERS gives its staff more investment power

CalPERS' investment committee on Monday changed its investment policy to give staff more leeway for 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 is 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 Monday are raises to the chief investment officer'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 its 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, Carlyle Group and Apollo Global Management. 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.

Separately, Ms. Musicco announced CalPERS had hired Drew Hambly as a new investment director and head of corporate governance for CalPERS' global equity team. Mr. Hambly had been executive director of global stewardship for Morgan Stanley Investment Management. Simiso Nzima, managing investment director of global equity had been investment director and head of corporate governance until his promotion in October 2021. MSIM didn't immediately provide information on a replacement.

Also on Monday, the investment committee approved its first Diversity in the Management of Investments Report mandated by a new California law signed by the Gov. Gavin Newsom in October 2021 to promote the inclusion of more women and minority-owned money managers in the asset management industry. CalPERS committed or invested $481 million with seven emerging managers and $3.2 billion with 12 diverse managers in the first six months of 2022, the report showed. Both categories included investments made directly and via funds of funds, the report said.

In the first six months of the year, CalPERS committed $2.9 billion to diverse private equity managers, committed $165 million to diverse real asset managers and invested $141 million to diverse global equity managers. The nation's largest pension fund also committed $175 million to emerging private equity managers, $165 million to emerging real asset managers and invested $141 million to emerging global equity managers.

Some emerging managers are also counted as diverse 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, at Monday's meeting.

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, Mr. Andrus said.

"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."

As of June 30, CalPERS had $195.2 billion in global equity, with $141 million invested with external managers during the six months ended June 30; $117.6 billion in fixed income with $133 million invested with external managers in the first half of 2022, none of them diverse or emerging managers; $65.3 billion in real assets, with $5.9 billion committed to external managers in the first half of the year; and $52.8 billion in private equity with $8.1 billion committed to external managers in the six months ended June 30.