Following a restructure of the team along functional lines, the CalPERS internal passive equity team is now able to handle any risk or complexity in the portfolio at least as well as any external manager, according to a review by its consultant Wilshire, although some extra coding of the Charles River system for compliance purposes is recommended.
In the past year the structure of the team has changed from a single portfolio and backup portfolio manager handling all aspects of a portfolio, to three functional lines: a strategy team that determines the active weights in a model of one of the quasi-enhanced portfolios; a construction team that converts the active weights into actual desired positions and trade lists; and a trading team of three individuals that handles all transaction for all portfolios.
“In our opinion, this new structure allows team members to specialise in various skill areas and will also provide some increase in capacity for the team as future strategies are added. With more than a year of actual experience under this new organisational system, it is apparent to us that the new structure allows for a much more streamlined workflow and has substantially increased staffs’ management capacity”Â Wilshire says.
The internal team manages $70 billion across 16 passively-constructed funds benchmarked to various indices.
These portfolios include the PERS Custom 2500 index (a broad US portfolio), US microcap, US fundamental-based index, developed international equity, non-US fundamental-based index, REITs, emerging markets and the Dynamic Completion Fund.
A number of the funds, with the exception of REITs, the DCF and the fundamental index portfolios, adopt semi-enhanced management allowing for a small amount of active management.
In Wilshire’s 2008 and 2009 reviews, it highlighted a number of technological issues with the fund’s database systems and trading platforms. There have been a number of technology reviews and the consultant says it has greatly improved the quality and speed of data on the trading platform.
The consultant conducted a number of trade tests as part of a compliance review. All the transactions that are forbidden, such as buying a stock on the Sudan list or one on the insider trading list, were blocked.
Similarly those that are not explicitly forbidden were tested, including buying a preferred stock, buying a non-dollar stock in a US portfolio, and selling a security short.
Wilshire says there was room for the Charles River compliance system to be programmed to include the guidelines for each internal portfolio, so it presents the trader with a warning message if they made an error that would violate the guidelines but not the compliance rules.
“While the initial investment of time and energy to program in all the policies would be moderately large, the result would be that staff and State Street would substantially reduce the need to correct errors in the future.
We reiterated our suggestion this year that the Charles River system be coded as described to present traders with more warnings.”
The consultant noted that staff had responded that given the functional restructuring, such flags are unnecessary and would waste programming time, and that given that every trade is entered, reviewed, and executed by different people, the odds of an error or intentional bad trade making it all the way through the system are very low.
Wilshire agrees that errors are a low probability event, but still suggest that further programing could prevent mistakes from slipping through even multiple sets of eyeballs if resources allow.