CalPERS in September could change how it calculates tracking error, which would eliminate private equity and real assets from its total fund tracking-error calculation and tracking-error limits on its asset allocation.
According to proposed investment policy changes shared Monday with the investment committee, CalPERS would remove a requirement that its asset allocation be managed within a target forecast annual tracking error for its asset allocation compared to its benchmark of 0.75%. The asset allocation limit of 0.75% implies that during any one-year period, there will be less than a 5% probability that the active asset allocation return will fall less than 1.2%, the existing investment policy said.
If adopted, the total fund would instead have an active risk target "consistent with forecast tracking error" up to 1% relative to its benchmark. The proposed methodology would remove private equity and real assets from its calculation as well as eliminate annual tracking error limits.
The current methodology restricts the pension plan's ability to invest in private assets, CalPERS CIO Dan Bienvenue told the committee.
"What we don't want to see happen is that we get a disincentive to invest in private markets, specific private equity," he said.
Private equity is measured against a public equity benchmark, Custom FTSE All World All Cap Equity, plus 150 basis points, but "the active risk it's talking about is against public equity" and private equity is "fundamentally not public equity," Mr. Bienvenue said.
"Actionable tracking error limits the noise that naturally results from investing in private assets where the nature of the benchmarks adds tracking error simply through deployment of assets," said Arnold B. Phillips, interim deputy CIO.
Currently, CalPERS has a target forecast annual tracking error of 1.5%. As of April 5, the pension plan's tracking error was 1.11%. Using the proposed "actionable tracking error" methodology that would exclude alternative investment asset classes, CalPERS' actionable tracking error on April 5 was 0.16%.
Separately, CalPERS staff plans to speak with one of its private equity managers, Ares Management, concerning tenant evictions by its portfolio companies, Front Yard Residential, an owner of single family homes for rent, said Mr. Bienvenue, following a public comment period held during Monday's meeting.
During the public comment period, Alyssa Giachino of the Private Equity Stakeholders Project, said that Front Yard has filed more than 500 eviction actions since the beginning of 2021, including more than 390 eviction actions in the Clayton County, Ga. She said that Front Yard and its property management subsidiary, Haven Brooke, have filed to evict residents at a much higher rate in majority Black counties. Since Jan. 1, Front Yard has evicted 15% of its tenants in properties located in Clayton County and 18% of its residents in neighboring DeKalb County.
"We have seen a number of filings in the past month where Front Yard has sought to circumvent the moratorium by not renewing leases of residents that have filed CDC hardship declaration," she said.
"Front Yard is in full compliance with all applicable laws and regulations and has not and will not actually evict a resident if that resident follows the CDC guidelines and has a valid CDC declaration in place," a Front Yard spokeswoman said. "Front Yard seeks to work with its residents to avoid evictions. Front Yard does not collect racial composition data so claims of targeting tenants of certain demographics are without merit."
After hearing Ms. Giachino's public comment, Theresa Taylor, investment committee chairwoman asked staff to follow up with Ares.
An Ares spokesman said that Ares is a limited partner in a partnership controlled by Pretium, a single family home for rent operator. In January, Pretium and two Ares' funds — one real estate, the other private credit — delisted Front Yard, which was formerly a REIT.
