CalPERS in March may change its 14-month-old asset allocation to increase its allocation to private markets and decrease its allocation to equities and fixed income, according to a staff presentation at the Nov. 13 investment committee meeting.
The $446.7 billion California Public Employees' Retirement System, Sacramento, completed an asset-liability study and adopted its current asset allocation in November 2021, with the current asset allocation going into effect July 1, 2022.
During the midcycle asset-liability management review, CalPERS' staff said it is not scheduled to launch another asset-liability study until February 2025.
In March, the staff is expected to recommend an asset allocation that would boost private equity 4 percentage points to 17%, while cutting equities by 5 percentage points to 37%. The proposal would also increase private debt by 3 percentage points to 8%, while reducing fixed income 2 percentage points to 28%. Real assets would maintain its 15% target allocation, and total portfolio leverage would stay at 5%.
Dan Bienvenue, CalPERS interim chief investment officer, told the committee that the proposed asset allocation would not only increase CalPERS' exposure to private markets but "slightly lean into fixed income." He later explained that the staff considered private debt to be fixed-income exposure.
Sterling Gunn, managing investment director, total fund portfolio management, said at the same meeting that the staff would have asked for a larger private equity portfolio in 2021 if it had not been working under "constraints." When CalPERS adopted its current asset allocation in 2021, achieving "13% (in private equity) seemed like a stretch," Gunn said.
There was also a change in market conditions that made fixed income more attractive as well, he said. In 2021, the staff didn't think that in the near term fixed income was particularly appealing, Gunn said.
However, the denominator effect in which lower equity returns pushed down the value of its equity portfolio and increased private markets holdings, which write down assets more slowly than public markets, caused private market portfolios to be close to their target allocations, Bienvenue said.
During the meeting, board President Theresa Taylor noted that CalPERS had not changed its asset allocation before conducting a scheduled asset-liability study since she was first elected to the board in 2015 and asked why the staff wanted to change the pension fund's asset allocation now.
Bienvenue said the staff was bumping up against the maximum private markets allocations, and if equities dropped again they would be overallocated to private markets.
"If we have another drawdown we would reach the limit," he said.
As of Sept. 30, CalPERS had 15.3% invested in real assets, more than its 15% target allocation; 14% in private equity, above its 13% target allocation; and 2.4% invested in private debt, below its 5% target allocation.
Separately, the board directed the staff to look into issues raised during the public comment period in which migrant workers told the committee about working conditions at hotels operated by hotel operator Aimbridge Hospitality, a portfolio company of Advent International, in which CalPERS is an investor. According to the local union, UNITE HERE Local 11, employees at 12 Aimbridge-operated hotel properties have gone on strike in Southern California asking for higher wages and affordable benefits.
Unhoused migrant temporary workers have been employed at the Holiday Inn LAX and Hilton Pasadena, both operated by Aimbridge, according to workers who spoke at the investment committee meeting. Recent migrants who were staying in shelters talked about being approached to work in these hotels, put to work without training or breaks, and paid without receiving information on how much they were receiving per hour.
"We have emigrants, asylum seekers who are being used as strike breakers. We have allegations of child labor … playing one ethnic group off of another in a strike situation," said Lisa Middleton, a CalPERS board member at the meeting. "These are not the kind of practices that CalPERS can support and endorse."
During the discussion regarding a potential asset allocation change, Middleton said that during public comments the board heard "some pretty harrowing commentary coming from individuals in the workforce, and that's all private equity-driven investment.
"I appreciate where we're trying to go, but I'm also chastened by the knowledge that the greater investment that we put into private equity, the increased responsibility that we have to ensure that we are working with partners that actually do share our values and our long-term values."
"Aimbridge holds itself to the highest standards of safety and guest experience, which includes ensuring adherence to employment and labor laws," an Advent International spokesperson said. "As the company continues operations, they rely on third-party temporary labor providers to fill critical staffing positions and are committed to ensuring all partners comply with these policies and regulations."
