CalPERS plans to build out an opportunistic investment program and take a serious look at active risk, among other initiatives, in fiscal 2020.
The $384.4 billion California Public Employees' Retirement System, Sacramento, is aiming to create a program to make investments "that present themselves across asset classes, where there may be some structural anomalies in the market or there's a meaningful dislocation in the market," said Rose Dean, a managing director at general investment consultant Wilshire Consulting, at an investment committee meeting in August.
The opportunistic strategies, funded across asset classes, are expected to enhance the pension fund's total fund risk-adjusted returns, she said.
In fiscal year 2020, the investment committee and staff also are attempting to sort out the active risk in the portfolio, said Eric Baggesen, managing investment director, trust level portfolio management.
That active risk is expressed in ranges around the target allocation, reflecting how much the portfolio can vary from the target allocation. As implemented as of July 1, the only target range that changed from the prior strategic asset allocation was the liquidity portfolio, now 3% to -6%, Mr. Baggesen said.
"You also provide a risk tolerance attached to the utilization of leverage," he explained.
Mr. Baggesen noted that CalPERS' 1% liquidity portfolio has the ability to add leverage to the entire portfolio, which CalPERS calls borrowed liquidity.
CalPERS CIO Yu "Ben" Meng said at the same investment committee meeting that borrowed liquidity means that in a market drawdown, CalPERS staff will be able to borrow against assets to take advantage of the market dislocation.
Staff is trying to be disciplined in using active risk, Mr. Baggesen said.
"We're only using active risk if we believe, or have a reasonable belief, that somehow that variation is going to result in a positive return,'' Mr. Baggesen said.
For fiscal year 2019, that positive return didn't happen, even with the use of active risk, Mr. Baggesen added.
"So one of Ben's significant projects that we're undertaking is really a review of the utilization of active risk in the plan with the intent to be very disciplined about the deployment of active risk only in areas where we have a great conviction that we're going to have a positive outcome."
