Updated with correction
CalPERS approved new investment policies for its global equity and global fixed-income portfolios.
The $385.1 billion California Public Employees' Retirement System, Sacramento, had $191.2 billion in global equities and $112.3 billion in global fixed income as of Sept. 30.
CalPERS' global equity portfolio is divided into market capitalization-weighted and factor-weighted segments. The new global equity policy, which was approved Monday, provides that the strategic objective of the capitalization-weighted equity portfolio is to provide economic growth and "a reliable source of liquidity." The goal of the factor-weighted portfolio is for economic growth with reduced overall volatility and some diversification of equity risk. CalPERS had $134.2 billion in its capitalization-weighted equity segment and $56.9 billion in factor-weighted as of Sept. 30.
The new policies shift reporting of certain violations of investment restrictions and constraints from the investment policies themselves to the investment procedures and guidelines. The impact of these changes is that violations will now be reported to senior investment staff rather than to the board.
The new policy removes the 15% limit on illiquid assets in the global equity portfolio. Restrictions regarding concentration risk, out-of-benchmark bets and use of derivatives are now in the pension fund's investment procedures document and not in the investment policy.
The global fixed-income policy removes domestic and international sector ranges. The new policy replaces constraints on three former sectors — dollar-denominated fixed income, international fixed income and credit enhancement — with constraints on three new sectors: long Treasury, long spread and high yield.
The earlier version of the policy included permissible ranges for fixed-income sectors, including U.S. Treasury and government-sponsored debt, mortgages, corporate, opportunistic and sovereign.
Both policies remove a clause that had required the staff to report to the board at its next meeting when staff members have concerns about or problems with the policy, and all violations of the policy.
Katherine H. Crocker, investment director, investment controls and operational risk, explained that the staff still has that obligation but it is now part of the total pension fund investment policy the investment committee approved in September. That policy provides that the staff shall report problems with, material changes to, and all violations of CalPERS' investment policies except for temporary underweights or overweights arising from the investment committee's adoption of new program and/or subprogram asset allocation targets.
Separately, CalPERS is winding down its forestland portfolio as well as non-core assets across its real assets portfolio due to underperformance. CalPERS had $40.9 billion in real assets as of June 30, with $32.9 billion in core real assets. CIO Yu Ben Meng told the investment committee that the staff is exploring ways to speed up the process.
CalPERS has wound down about $10 billion of non-core, legacy real assets in the past four years, said Paul Mouchakkaa, managing investment director, real assets.
CalPERS had $1.3 billion in forestland as of June 30. It sold some timberland last year at a loss of $1.6 billion.
At the same time, CalPERS officials are researching investment in other forestland for its potential carbon offset, said Beth Richtman, managing investment director, sustainable investments, in response to a question from Betty T. Yee, California state controller and a board member.
However, CalPERS is waiting for state and federal lawmakers to provide incentives to institutional investors to invest in carbon offsets, Ms. Richtman added.
CalPERS' entire real assets portfolio underperformed its benchmark in multiple time periods. The portfolio earned a net return of 3.7%, underperforming its benchmark by 283 basis points for one year; 6.4%, some 42 basis points under its benchmark for three years; 7.5%, a 111-basis-point underperformance for five years; and 4.1%, below its benchmark by 430 basis points for the 10 years ended June 30. Real estate and forestland also underperformed their benchmarks for all periods. Infrastructure was the only real asset portfolio that outperformed its benchmark for all time periods.
Mr. Mouchakkaa attributed the real asset portfolio's underperformance mostly to sales for a loss. He also attributed underperformance to CalPERS writing down its retail real estate portfolio before the benchmark index had done so.
During the meeting, board President Henry Jones asked why pension fund officials have not made more progress increasing the infrastructure portfolio. CalPERS had $4.8 billion in infrastructure as of June 30. CalPERS does not have an infrastructure target allocation. Its real asset target allocation is 13%, while the actual allocation is 11%.
