CalPERS is considering adopting an “opportunistic” program seeking to profit from substantially undervalued assets across various asset classes and strategies, and will be limited to 3 per cent of the fund’s total market value.
The introduction of the new opportunistic bucket, which would be an active portfolio drawn from a number of asset classes or strategies either internally or externally managed, is a result of an asset allocation workshop attended by the investment committee, staff, and consultants in May.
In addition to a limit of 3 per cent of the fund, which could as much as $5.4 billion of the $180 billion fund, the strategy would be subject to diversification guidelines including: no more than 1.5 per cent of the total fund in non-publicly traded investments; the market value of any program strategy or type of asset should not exceed 2 per cent of the fund; and no more than 1 per cent of the aggregate market value of program assets of a single country, except the US.
Both the fund’s consultants and staff have recommended the investment committee adopt the new opportunistic strategy at their meeting next week, however one of the consultants, Wilshire Associates, voiced a few hesitations about the implementation of an opportunistic strategy that pertained to the fund’s overall asset allocation.
The investment committee is also expected to adopt new asset class ranges that were recommended at the same workshop, which included increasing the alternative investment (AIM) target allocation by 4 per cent to 14 per cent; increasing cash from 0 to 2 per cent, fixed income from 19 to 20 per cent; and reducing global equities by 7 per cent to 49 per cent. It is also expected to do away with its short-term AIM benchmark.
In a letter to CalPERS’ chief investment officer, Joe Dear, Wilshire managing director Andrew Junkin said there were a number of issues relating to the adoption of an opportunistic program the investment committee should discuss with staff.
He said given the changes to the proposed asset allocation targets and ranges, staff at CalPERS had already been provided with some flexibility to tactically manage across asset classes, and it could be the case that the opportunistic strategy would be competing with the existing asset classes for capacity where supply was scarce.
In addition, the opportunistic strategy could invest in an asset class where staff were not using that capacity. Junkin recommended the investment committee discuss how such conflicts would be managed. He also said that monthly reporting would be appropriate in the initial stages of the adoption of an opportunistic strategy.