CalPERS officials might leverage the portfolio as part of a plan to help the pension fund weather an economic downturn.
The topic came up in a response by CIO Yu Ben Meng to a question from Lynn Paquin, California Controller Betty T. Yee's designee on the board, regarding what investment policy changes the staff could request so staff members could act more quickly in the event of a market drawdown.
"Yes, very good question. So, for example one of the undesirable outcomes during a drawdown is we don't have money to deploy to take advantage of a market dislocation," Mr. Meng said. "And one of the ways to generate additional liquidity is put on leverage on the total fund. So, we borrow money."
This would impact the total fund's leverage policy, Mr. Meng noted.
However, he added that the emerging plan is currently under development and the staff will return to the investment committee to seek an investment policy change if needed.
Mr. Meng declined to comment further on whether the staff plans to leverage the entire fund in preparation for or in the event of a market downturn.
We're having (and have had) discussions about the use of leverage in the asset allocation work for years, spokeswoman Megan White said in an email.
Officials for the $365.1 billion California Public Employees' Retirement System, Sacramento, can use some leverage on the portfolio already, Ms. White noted. CalPERS' treasury management policy references "borrowed liquidity," which is the short-term use of leverage to help maintain the pension fund's target risk profile. Borrowed liquidity requires CalPERS to have a plan to unwind the debt if the duration extends past 90 days. CalPERS' investment policy also allows the use of leverage within global fixed income, global equity and real assets.
"These asset class leverage capabilities have been in place since late 2008 when staff requested the board insert it into the global equity policy to allow us to run notional leverage via equity exposure, from derivatives being supported by assets other than cash," Ms. White said.
