CalPERS' investment committee voted to switch to what pension fund officials call "actionable tracking error," a risk-control method that now will only take the plan's public assets into consideration.
According to a newly revised investment policy statement containing the tracking-error changes, the $491.8 billion California Public Employees' Retirement System, Sacramento, uses tracking error to define staff discretion to deviate from the pension fund's policy benchmarks. The change, approved Monday, removes a requirement that the asset allocation for its entire portfolio be managed within a target forecast annual tracking error compared to its benchmark of 0.75%.
Instead, the total fund has an active risk target "consistent with forecast tracking error" of up to 1% relative to its benchmark. The methodology removes alternative investments from its calculation as well as eliminates annual tracking-error limits.
The policy requires staff to inform the board of a tracking-error deviation and to develop a plan to move the tracking error back to the target range "if deemed advisable, taking into account strategy horizon, transaction costs, and liquidity conditions."