As CalPERS officials guide the plan toward a new four-year asset allocation cycle in 2022, a Pensions & Investments' analysis reveals that the plan has been bucking a trend among other U.S. pension plans — moving more assets into equities and fixed income rather than cutting those asset classes in favor of alternative investments.
The $384.4 billion California Public Employees' Retirement System, Sacramento, had 80% of its portfolio invested in stocks and bonds as of Sept. 30, according to data from P&I's annual survey of the largest U.S. retirement plans. That was up from 68% as of Sept. 30, 2016, when the board began the process leading up to the adoption of its latest asset allocation.
Some 18% of its assets were in alternatives as of Sept. 30, down from 21.8% in 2016. Only real estate, accounting for 11% of assets, increased from Sept. 30, 2016, when it stood at 9.1% of assets.
By comparison, the pension plans of the top 200 plan sponsors surveyed had 72.1% in equities and fixed income as of Sept. 30.
CalPERS officials declined to be interviewed for this story. However, since he joined CalPERS as chief investment officer in January 2019, Yu "Ben" Meng has promoted investing in private equity and private credit. CalPERS has an 8% target to private equity but a current allocation of 6.9% in the asset class.
"We need private equity to be successful, we need more of it, and we need it sooner rather than later," Mr. Meng said at a March investment committee meeting.
More recently, Mr. Meng guided a discussion on the topic of private credit, noting that private debt was currently not an asset class in the system's portfolio. "I think that's something we overlooked in the past, particularly given the changes in regulation after the global financial crisis," he said late last year. "So currently, it's not in our portfolio. We think it should be."
CalPERS typically conducts an asset-liability study every four years and a midcycle review every two years. CalPERS' latest asset allocation went into effect July 1, 2018.
CalPERS' most recent strategic asset allocation increased its equity allocation to 50% from 46% and boosted fixed income to 28% from 20%.
But pension officials also eliminated its 9% inflation assets allocation, which had also invested in some fixed-income-type instruments and commodities. The inflation portfolio was liquidated as of February 2019, according to CalPERS agenda materials.
Real estate and private equity retained their target allocations of 13% and 8%, respectively, while its liquid portfolio, made up of cash and other short-term instruments, was cut by 3 percentage points to 4%.
A month before the investment committee adopted the strategic asset allocation in November 2017, it lowered the credit quality of its liquid portfolio to BBB from predominantly BBB+.
The change was intended "to expand the investment universe around government-guaranteed instruments," said Wylie Tollette, who was then CalPERS' chief operating investment officer. "And the fundamental logic is that a government-guaranteed instrument has a fundamentally lower level of credit risk than a corporate instrument."
Cash accounted for 0.8% of CalPERS' total plan assets as of Sept. 30 vs. 4.3% as of Sept. 30, 2016, P&I data show.
On balance, CalPERS' strategic asset allocation increased the pension plan's combined stock-and-bond target to 78% from 75%, which is reflected in the asset mix shifts CalPERS has reported to P&I over the past three years.