After four months on the job, CalPERS CIO Stephen Gilmore is taking initial steps to move the board toward replacing its current strategic asset allocation approach and invest the portfolio with a total portfolio management strategy.
The idea of the total portfolio approach is to focus on the whole portfolio “rather than asset class by asset class,” Gilmore said at the Nov. 19 investment committee meeting of the $522.4 billion California Public Employees’ Retirement System, Sacramento.
Gilmore's former employer, the NZ$76.6 billion ($46.7 billion) New Zealand Superannuation Fund, Wellington, uses the total fund approach to investing, he noted. To make the approach work, asset owners need have team collaboration and “a common language for looking at returns across asset classes,” he told the investment committee.
While pension funds and other asset owners that have adopted the strategy each do it differently, the idea is for the board to set a few broad goals for managing the entire fund and give staff the task of implementing the strategy with one reference portfolio-type benchmark, such as one based on a 60% equity-40% bond portfolio, as well as a risk budget, Gilmore said.
An investment would be made based on whether it would contribute to the desired outcome of the total fund rather than whether it would help fill out the asset class target allocation, he explained.
“Right now, we have 11 benchmarks and a lot is customized,” Gilmore said. "We can have one and we can look at one portfolio and we'll allocate capital based on how much exposure each of these have.”
Gilmore said that the board will get further information about the approach at its coming Jan. 13 board education day.
“At its most basic, a total portfolio approach asks the team to construct a portfolio to achieve the objective,” he said. “It is direct. So, everything is focused on the whole of the portfolio.”
With a siloed strategic allocation, a fund has a number of asset classes, each with its own benchmark, Gilmore said.
“Because each asset class has its own, a head of the program area will try to beat the individual benchmark,” he said. “What happens is they end up with a diversified portfolio in each asset class.”
What also happens is that “you can't be sure the next dollar you will invest will be (in) the most attractive” investment because it may just be invested to fill up a target allocation, Gilmore said.
The nation's largest public pension fund may be better off investing that “next dollar” somewhere else, he said.
