Asset Allocation

CalPERS assumes lower returns

The California Public Employees’ Retirement System has defined its 10-year capital market assumptions, which are the essential input for its four-yearly asset liability modelling (ALM) and, ultimately, for the asset allocation in its reference portfolio.

Determining the capital market assumptions is the first item in a six-step process CalPERS uses to set its policy portfolio in ALM workshops.

This year’s assumptions, which the internal staff presented to the board, showed much lower expected returns and higher expected volatility for CalPERS’ strategic investment classes than those developed for 2013.

As a result, one of the fund’s consultants, Pension Consulting Alliance, advised that “these latest inputs will very likely translate into lower long-term expected compound returns for the range of strategic portfolio options the investment committee will consider during the 2017 ALM process”.

The capital market assumptions the CalPERS internal team proposed, after input from its consultants and other players in the industry are:

Asset class                  compound return (%)           volatility (% standard deviation)

Global equity              6.8                                           17

Private equity              8.3                                           25.5

Fixed income              3                                              6.6

Real assets                   5.8                                          12.6

Inflation                      2.8                                           8

Liquidity                     2                                              1


The return estimates the $323 billion fund derived were modest compared with some others in the industry. For example, in private equity, its return estimate of 8.3 per cent is significantly below the projected return assumption of its private-equity consultant, Meketa, which forecasts 9.6 per cent. This is primarily because CalPERS has a lower expected return for global equity than Meketa. Both expect a premium for private equity above global equity of about 1.4 or 1.5 per cent.

All asset assumptions are based on inflation and a real risk-free rate, with assets then divided into three categories – low, medium or high risk premium.

Input from one of CalPERS’ other consultants, Wilshire, shows return prospects across all asset classes have been declining for decades, following the downward trend in interest rates. Core fixed income remains low, and the risk premium for every other asset class is anchored to fixed income.

Once the capital market assumptions have been agreed upon, the process for developing a new strategic asset allocation will begin. As at June 30, 2016, CalPERS asset allocation was:


Public equity               51.1%

Income                        20.3%

Real estate                   9.3%

Private equity              8.9%

Inflation                      6.0%

Liquidity                     1.5%

Infrastructure              0.9%

Forestland                   0.7%

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