CalPERS has reduced its total fund tracking error from 2.17 per cent to 1.94 per cent in the quarter to June 30, but it still sits above the budgeted 1.5 per cent.Total fund tracking error is composed of active allocation and security/sector allocation, with diversification allowing the total amount (1.94 per cent) to be less than the sum of the components (0.68 per cent and 1.98 per cent).
According to a paper presented to the board, as asset allocation moves closer to the policy allocation the active allocation risk budget has moved down, sitting at 0.68 per cent and below the budgeted 0.75 per cent.
The tracking error due to security selection and sector tilts has increased, primarily in global equities. But the decline in total fund tracking error suggests the asset allocation bets are offsetting some of the security and sector tilts.
Forecast total risk increased slightly for the public asset classes but decreased for the private asset classes relative to prior quarter.
Because global equity is managed more closely to the benchmark it has the lowest tracking error of the publicly traded asset classes, but it did increase by nearly 20 basis points since the last quarter.