About half of the $201 billion in assets managed by CalPERS is available to liquidate within 90 days according to a new total fund liquidity assessment to be presented to the investment committee as part of the quarterly risk management update, which also shows the fund to have a total leverage of 19 per cent, or $37 billion.
For the first time the quarterly risk management report introduces measures of industry concentration and total fund liquidity, as well as its regular report on volatility, leverage, currency and counterparty risks to be presented at the investment committee meeting next week.
For the first time risk staff has conducted an assessment of the liquidity of all holdings across the total fund.
According to its assessment $100 billion of the total fund market value is available to liquidate if needed from the sale of public market equity and fixed income government holdings within a 90 day period.
This assessment will be revised as market conditions change, and risk staff will also be further developing metrics and a report which measures the liquidity risk of the fund.
The total leverage amounts to $37 billion or 19 per cent of CalPERS assets excluding the alternatives program.
Real estate in particular is at a leverage level of 64 per cent compared with a program limit of 60 per cent and the real estate unit is currently evaluating how to correct this excess leverage. Global equity recently established a notional leverage limit of 10 per cent and this is currently at 1 per cent.
Also for the first time in its overall risk assessment, the fund has reviewed industry concentration within its overall portfolio.
As of September 2009 financial was the largest industry holding in the CalPERS total portfolio, with this sector accounting for about $26 billion in exposure across equities and fixed income, which is about 13 per cent of the fund. The next highest is consumer, non cyclical, at 9 per cent of the portfolio.
In the future, the holdings will be compared against industry concentration in the policy benchmarks.
According to the risk assessment the volatility of the total fund continues at historically high levels.
The projected volatility for the total fund, which represents the level of risk for the actual asset allocation and actual portfolios, has remained at a high level in the quarter, decreasing slightly from 19.4 per cent to 19 per cent.
According to the report this volatility suggests, with a two thirds probability that the total fund actual return one year out will fall within a range of plus or minus 19 per cent around the expected return.
The tracking error of the fund arises from two active management decisions: asset class level under and overweights, and security and sector selection within asset classes.
The September 30, 2009 forecast tracking error due to asset allocation is 100 basis points, which is over the limit of 75 bps.
This measure increased as a result of the equity markets rallying and the fund maintain a significant overweight in global equity compared to the recently reduced target allocation to global equity.
The forecast values indicate that CalPERS actual asset allocation with benchmark portfolios is expected to result in a total fund volatility of 17.7 per cent.
The report shows that if instead the fund was invested in line with the target asset allocation and benchmark portfolios the expected volatility of returns would be lower at 17 per cent (policy risk)
The total fund tracking error, which is a combination of security/sector selection and asset allocation active risk, is 290 basis points compared to a limit of 150 bps, which is the same as the total fund tracking error reported last quarter.
According to the risk management report, historically the total fund tracking error has been under the 150 bps target but has increased since September 2008 due to higher market volatility resulting in higher level of active risk in the portfolio.
