CalPERS once again finds itself with no CIO to drive new allocation

With the departure of CIO Nicole Musicco at the end of September, CalPERS will once again have to fill the chief investment officer post, a relatively common occurrence at the $463.6 billion pension fund as she becomes the second straight CIO to leave after only 18 months on the job.

The California Public Employees’ Retirement System, Sacramento, again turns to Deputy CIO Dan Bienvenue to serve as interim CIO, having already served more than 18 months in that role after the abrupt departure of former CIO Yu “Ben” Meng in August 2020. This makes Bienvenue the longest-serving CIO since Theodore Eliopoulos, who served as permanent CIO for four years and acting CIO for 15 months before that, leaving CalPERS in 2018.

“We will waste no time in launching a wide-ranging recruitment for a new permanent CIO,” CalPERS CEO Marcie Frost said at the Sept. 20 board meeting. Frost did not provide a timeline or other details about the recruitment process.

CalPERS officials have been focused on ensuring continuity with the incoming interim CIO and have yet to set the details around the CIO recruitment process, spokesman John Myers said.

In bidding farewell during her final appearance before CalPERS’ investment committee as CIO on Sept. 18, Musicco said she appreciated their welcoming “the Canadian with big ideas.”

But she acknowledged that during her 18 months as CIO she did not get universal support from the investment team, which nevertheless delivered on “very ambitious goals.”

“There will always be a small minority that fight change, but the vast majority of this team embraced change from the start,” Musicco said.

She said she is proud and grateful to work for an organization that sees the human side of team members. Musicco said her family needs her back in Toronto, and so she had to make the “unfortunate decision” to step down at the end of the month.

She thanked Frost, to whom she reports, for “leading with compassion.”

“Nicole’s tenure at CalPERS was shorter than she or I would have hoped, but she has helped the organization bridge the gap between its aspirations and its operations, and we are better for it,” Frost said. “Her decision to focus on family took courage, and we will be rooting for her as she returns home to Canada.”

But Musicco’s departure will not leave CalPERS’ investments unattended, Frost said.

“Our leadership team remains in place from the very capable managing investment directors to the organization’s entire executive team,” Frost said. “We are not going to miss a beat when it comes to the work we need to do to fulfill the mission of CalPERS.”

Jim Scheinberg, the managing partner of fiduciary search firm North Pier Search Consulting, Marina Del Rey, Calif., said it will be difficult to find a new chief investment officer who will be the right fit for CalPERS.

“It’s an incredibly high-profile job. Who wants to live under a microscope?” Scheinberg said. But, he added, “to deploy a half-trillion dollars in capital, that’s the GOAT of the investment world.”

Musicco joined CalPERS as CIO on March 28, 2022, four months after the pension fund had adopted its latest asset allocation that added 5% total fund leverage and a 5% opportunistic allocation while boosting private equity, fixed income and real assets at the expense of stocks and liquidity. The new strategic asset allocation did not go into effect until July 1, 2022, she reminded the investment committee.

One of the main goals in implementing the asset allocation was to build innovation and resiliency into CalPERS’ processes.

During her tenure, CalPERS committed $1 billion to diverse and emerging managers in private markets; accelerated its private markets investing by starting to invest in venture capital and increasing co-investing; created liquidity and risk frameworks; and leaned into environmental, social and diversity issues, Musicco said.

CalPERS made the $1 billion commitment in diverse and emerging private equity firms in the fourth quarter, committing $500 million each to TPG Next (A), a fund that aims to provide growth capital to a more diverse set of investors and entrepreneurs including women, people of color and members of the LGBTQ+ community; and to GCM Grosvenor Elevate Fund I, a fund making seed investments in small, emerging and diverse private equity managers.

The goal in working with TPG and Grosvenor is to leverage the expertise of the two firms to select emerging managers with the potential of outperforming larger managers and to eventually bring the diverse and emerging private markets manager investment program in-house, rather than continue using an outside manager, Musicco said at the June 20 investment committee meeting.

“Manager selection is so instrumental in achieving returns, and choosing a manager that’s emerging has a few things implied. They likely don’t have a traditional track record. You have to kind of pull that together differently,” she said June 20. “And so we’re going to leverage that best in class and have that knowledge transfer.”

The majority of CalPERS’ private equity portfolio was in buyouts, accounting for $43 billion of its $59.7 billion private equity portfolio as of June 30. CalPERS had $963 million invested in venture capital at the end of its fiscal year. However, venture capital returns were dismal in the fiscal year ended June 30, down -20.7%, from a return of 37.2% in the prior fiscal year, according to a report by consultant Meketa Investment Group for the investment committee meeting. By the end of the fiscal year 2023, CalPERS had committed $30.4 billion to private assets, increasing its total unfunded commitments to private assets by $15.5 billion to $66.7 billion.

Also during Musicco’s tenure as CIO, CalPERS incorporated two new asset segments into the portfolio: private debt and emerging markets sovereign debt. At the end of fiscal year 2023, CalPERS’ total portfolio included 2% leverage, the first step toward the asset allocation’s 5% leverage target, a report for the Sept. 18 investment committee meeting shows.

Musicco also said she pushed to take on more active risk across the portfolio, including adding actively managed strategies run by outside managers in equities and fixed income, which was a culture change for CalPERS.

CalPERS officials are also in the early stages of developing a new data and technology strategy, in part, to remain competitive. Artificial intelligence is top of mind at many organizations, and “ours is one of those,” Musicco said.

However, Musicco said CalPERS’ portfolio is very exposed to growth risk that her team tried to reduce by an increased identification of private market investment opportunities, its new asset allocation implementation and its use of strategic leverage. These moves are not only to increase returns but to cut reliance on equity and growth premiums, she said.

“Last year, the team accepted an ambitious challenge of nine initiatives,” Musicco said.

“Not everyone is going to be open to change, which oftentimes can result in some grumbling,” she said.

“The vast majority accepted the challenge to be change agents and lay the groundwork to be a best-in-class investment office.”

Among the changes, CalPERS created an investment talent and culture program to focus on “building a high-performance culture, unlocking a continuous growth mindset, and advancing ... CalPERS investment office as a ‘best-in-class’ destination employer,” the investment committee report said.

It was “a huge culture initiative” but necessary to reach CalPERS’ 6.8% expected rate of return, Musicco said.

She added that she is confident that culture change will continue under Bienvenue.

Even so, CalPERS did not meet its 6.8% expected rate of return in fiscal year 2023, earning a net 5.8% that nevertheless outperformed its 5.5% benchmark but was near the bottom of Pensions & Investments’ tracking of public pension fund returns. CalPERS’ $208.8 billion public equity portfolio was the top-performing asset class for the fiscal year with a 14.1% net return, the same as its benchmark.

The performance of private market investments, which Musicco was charged with bulking up under the asset allocation she had inherited, was mixed in the fiscal year. Its $10.3 billion private debt portfolio was the only private sector with a positive net return, at 6.5%, outperforming its 3.7% benchmark. The $70.4 billion real assets portfolio turned in a -3.1% net return, topping its -4% benchmark, and private equity was at -2.3%, above its -5.9% benchmark.

Portions of CalPERS’ asset allocation depressed returns compared with its peers, according to a report by one of the pension fund’s general investment consultants, Wilshire Advisors, for the investment committee meeting.

The main culprits were CalPERS’ higher-than-average fixed-income allocation and its increased real estate allocation, Thomas Toth, a managing director at Wilshire Advisors, told the investment committee.

CalPERS has a 30% fixed-income target allocation and a 15% real asset target, which includes real estate. As of June 30, it had a 26.4% actual investment in fixed income and 15.2% in real assets. The pension fund had $55.4 billion invested in real estate, representing 78.7% of its real assets portfolio at fiscal year-end. Real estate was one of CalPERS’ worst-performing sectors with a net -5.1% return in fiscal year 2023.

CalPERS’ investment team is also reviewing whether to bring to the committee in November a proposal to eliminate its $55.4 billion factor-weighted equity investment strategy, which the pension fund added in 2016 when it had a 68% funded status.

At the time, officials feared that an equity market drawdown would lead to a “death spiral” to lower than 50% funded, said Simiso Nzima, investment director and head of corporate governance, global equity, during the global equity asset class review at the meeting. The question is whether CalPERS still needs a factor-weighted portfolio, especially in a higher-interest-rate environment, Nzima said.