In the first move to implement the new strategic asset allocation approved in December, CalPERS has introduced a raft of new benchmarks including composite benchmarks for the new asset classes of growth, real and liquidity created under the restructure.
In addition to new benchmarks for the new asset classes, CalPERS has rejigged a number of the benchmarks for its existing asset classes, with notable changes including the expansion of the alternative investment management program benchmark beyond the US to a global composite.
The new growth asset class will be benchmarked against a mix of public equity (49/63) and the AIM benchmark (14 out of 63).
The new liquidity asset class will be benchmarked 75 per cent to Barclays TSY 2-10-year +25 per cent 1-month T-bill.
The real asset class is a composite of the real estate benchmark (10 out of 13) infrastructure, (2 out of 13), and forestland (1 out of 13).
The new public equity benchmark has moved from 95 per cent custom FTSE World Index to 100 per cent, it used to also have a 5 per cent allocation to T-bills + 5 per cent.
While the alternatives investment program has a more diversified benchmark, moving from 100 per cent US, to include one-third to the FTSE All World ex-US TMI.
Farouki Majeed, senior investment officer asset allocation and risk management, told the board that benchmarks were important not only because they constituted the policy benchmarks of the total portfolio, but also they represented the risk-return characteristics of the asset classes and a frame of reference in portfolio construction.
In other changes the infrastructure benchmark target has been reduced from CPI +5 per cent to CPI+4 per cent.
CalPERS has set of criteria for an ideal benchmark which includes:
- Completeness: accurate and comprehensive representation of the target investment opportunities
- Investability: the securities in the benchmark index are available for trading at low cost
- Clear rules: the method of identifying index security weights is clearly defined
- Accurate and complete data: information on performance and weights of the index securities is available.
- Low transaction costs: a portfolio can be managed that mimics the benchmark over time at low cost.
One of the board members, JJ Jelinicic asked whether the investment staff considered alternative benchmarks to market-cap weighted, such as equal-weighted.
But Majeed said the staff considered selecting such indices to be an active bet.
“Other indices may change your strategy. If you deviate from the broad market opportunity set you could argue you are making an active bet. For example equal-weighted indexes mean you overweight small caps and that’s an active bet,” he said.
Chief investment officer, Joe Dear, reminded the board that these benchmarks were long-term and needed to be “strong”. He said staff were also exploring the merits of dynamic asset allocation.