CalPERS’ investment staff, and its consultant Wilshire, are recommending the board re-hire the fund’s external fixed-income managers which represent 9 per cent of the $50 billion fixed-income portfolio, despite the long-term strategy of a preference for insourcing.
The external managers are used in currency overlay, international fixed-income where the entire portfolio is externally managed, and high yield (see below).
The fund insources wherever possible, and internally manages 91 per cent of the portfolio. It is estimated the cost of in house management is 1 basis point, compared with 30 bps for external management.
The fixed-income portfolio represents 23 per cent of the entire fund, and CalPERS plans to sell $6 billion in fixed-income assets to achieve the asset allocation target of 20 per cent within the next year.
Other priorities for 2011 include the creation of a CalPERS’ short-term investment fund to provide an alternative to the State Street Bank STIF. There is also a plan to hire two portfolio managers, in international research and US economics and commodities, and two high-yield analysts. This is consistent with Wilshire’s recommendations, which in its annual review recommended additional staff are needed as the portfolio continues to bring additional functions, such as high-quality yield, inhouse. The fund currently has 40 fixed-income professionals.
Next year will also see a review of the strategic purpose for the currency overlay program.
From July 1 this year the global fixed-income portfolio reduced the target volatility and risk limit by 50 per cent. It also reduced alpha targets in incentive compensation from 40 to 20 bps.
The investment committee also passed new policy guidelines which reduced the range of flexibility relative to the index in interest rate, sector, and concentration risks.
In its annual review of the global fixed-income team and portfolio, Wilshire notes that much of the active risk has been taken out of the investment process in an effort to have a more benchmark-aware portfolio.
“We view the new lower active risk approach as a prudent step in the overall evolution of CalPERS as the total portfolio now contains significant active risk in other programs (AIM, Real Estate, RMARS). Wilshire recommends the extension of contracts for the current managers as part of the overall portfolio.”
It recommended that the investment committee extend all of the manager contracts, and that CalPERS adds to internal investment staff, primarily in security analysis roles.
Since inception in June 1986, global fixed-income has returned an average annual alpha of 71 bps.
Most of the portfolio is in domestic fixed-income (92 per cent) which is made up of global governments, credit, structured securities, sovereigns, opportunistic, high yield and credit structured, and cash. It also has 1 per cent in special investments, and 7 per cent in international fixed income.
International fixed-income managers
Barings Asset Management
Rogge Global Partners
US high-yield manager returns
Columbia (high yield)
US high-yield managers employed less than 1 year or not funded
Columbia (leveraged loan)
External currency overlay managers
State Street Global Advisors