CalPERS’ public and private equity reset shapes performance

CalPERS is continuing to reap the benefits of an overhaul in its public and private equities programs three years ago as strong performance in both asset classes powered a double-digit return for the fund in the last financial year.

Public and private equities are the biggest allocations at the $637 billion fund, representing 36.8 per cent and 19.3 per cent of the portfolio respectively. They returned 24.1 per cent and 17 per cent respectively in the year to June 30, CalPERS said in an annual update. It delivered a 14.8 per cent return for the financial year on a fund level.

Both programs underwent significant transformation in 2022 in a bid to improve performance and CalPERS said their benefits continue to manifest in the portfolio.

In listed equities, CalPERS has been redeploying capital to active strategies since the end of 2022, said Steve Carden, investment director in the fund’s global public equities department overseeing active equity strategies, in a presentation to the board on Monday.

CalPERS’ active equities portfolio now represents 40.8 per cent of the public equities book, with its market value surging from $15.8 billion at June 2022 to $109 billion at May 2026. The active portfolio’s excess return against the benchmark also meaningfully lifted from a five-year average of 52 basis points in 2022 to 131 basis points in 2026.

Carden said the success of the program came from deploying to markets and strategies where active management has a proven edge.

“The success rate outside of the US is much higher and one of our focuses is to be in less efficient markets, so that means international and emerging markets. But we do have a couple of strategies that are global in nature, so they have the US as well,” Carden said.

Active equity strategies are organised into three buckets: quantitative enhanced index, multi-factor – both of which are internally developed and managed – and traditional active, which has quant and fundamental strategies.

“In the traditional active we have externally sourced strategies but we implement some of them internally with models so that we can have lower cost and operational efficiency,” Carden said.

CalPERS also emphasised its strict approach to active manager selection, which managing investment director Simiso Nzima said led to “a running quip [within the team] that it’s just as hard to be selected as one of our managers as it is to get into Ivy League colleges”.

“We’ve looked at the numbers, the selection rate for Ivy League colleges is about 5.2 per cent, and the selection rate for the active equity team is about 5.3 per cent,” he told the board.

Standardisation of the manager selection process a few years back means CalPERS was able to compress the selection timeline from 12-18 months before the overhaul to around nine months now, Carden said.

Another edge the fund says it has is a strong internal team that can negotiate favourable fee structures with active managers.

“We do feel like we pay fair when the performance, excess return is strong, but we want to pay as little as possible when it’s not,” Carden said.

“We’ve moved towards more base plus performance structure with very low base fees. Last year, we can in at 34 basis points overall for the [active portfolio], contrasting that with 60 basis points or more for off-the-shelf fees.”

Private equity switch-up

CalPERS initiated a “turnaround” of the private equity program in 2022 underpinned by “manager selection, lower-cost structures, and diversification” – a plan which is bearing fruit, the fund said in the annual update. In a presentation to the CalPERS board in June, Anton Orlich, deputy CIO of private markets, said the fund’s PE roster spans 134 managers and 421 funds across different strategies. Buyout is the biggest component, representing over half (57.3 per cent) of the program, followed by growth (31.6 per cent) and venture (6.4 per cent).

Orlich said that an important pillar of the turnaround has been to set consistent PE commitment pacing of about $16 billion per year to avoid a replay of the so-called “lost decade” of PE, referring to the period of 2009-2018 where CalPERS had less than $8 billion in annual PE commitment.

CalPERS is also pivoting towards a total portfolio approach and since July 1 has officially adopted a reference portfolio of 75/25 equities to bonds. A key feature of TPA is the so-called relative value principle where investments in different asset classes need to compete for capital against the total fund objectives.

But chief executive Marcie Frost said the PE program is likely to be somewhat insulated from capital competition, flagging at an industry conference this February that the PE team needs to continue to “operate more independently” and protect its ability to commit.

Another aspect of the overhaul is the diversification away from large buyout strategies, reducing the percentage it represents in the portfolio from 46 per cent in September 2022 to 33 per cent in March 2026 mainly via secondary sales.

Through secondary purchases and new commitments, the combined percentage of growth and venture in the portfolio lifted from 20 to 38 per cent through the same period.

Elsewhere in the financial year results, private debt delivered an 11 per cent return, while real assets and fixed income delivered 6.3 per cent and 5.9 per cent respectively. Annualised returns for the five-year period ending June 30, 2026 stood at 6.83 per cent; the 10-year period at 8.57 per cent.