Analysis of CalPERS’ total portfolio, where equity risk accounts for nearly 90 per cent of the risk allocation and yet the asset allocation to global equities and alternative investments is about 67 per cent, corroborates the trend towards allocating assets according to risk, not asset buckets.
In its quarterly risk report, to the end of December 2010, the fund outlines the “most significant risk” in the CalPERS asset allocation is the equity risk estimated to be nearly 90 per cent total risk.
“The combination of geopolitical instability, rising commodity prices, and inflationary pressure have the potential to negatively impact the improved growth trends and recent equity rally…. Lower growth and inflation will have material impact on returns as they affect equity performance.”
The projected volatility to CalPERS’ total portfolio, as at December 31, 2010, is 15.2 per cent, with policy risk (at 13.8 per cent) significantly larger than the total fund tracking error.
Policy risk refers to the risk in the policy benchmark, while the total fund tracking error is the expected volatility of active returns between the total fund and the policy benchmark, currently forecast to be 2.39 per cent. This is above the total risk budget of 1.5 per cent
Of the total fund tracking error the allocation from asset allocation is below budget (0.68 per cent versus 0.75 per cent) and security and sector selection (2.4 per cent).
The selection component increased nearly 40 basis points over the previous quarter, and has prompted staff to review these active risk limits and propose expanding ranges for approval by the committee in coming months.
Total fund forecast total risk is 50 basis points lower than last quarter, in line with declining overall market volatility. All of the asset classes experienced lower total risk over the last quarter, with the exception of global fixed-income.
The risk management unit also monitors total fund concentrations across asset classes including country, industry, currency and security types, the current cross-asset class industry overweights include capital goods, consumer durables and apparel, and diversified financials.
Underweights are energy, food beverage and tobacco, materials and REITs.
Asset type concentrations are an overweight to structured credit and underweight to government bonds. The largest active exposure to a particular country is an underweight to the US
CalPERS total fund
Asset class Asset allocation risk allocation
Global equities 53% 66%
AIM 14 20
RE 7 7
ILAC 3 3
Cash 2 0
Global fixed income 21 4
