…as consultant assessment initiates changes to internal equity team and technology

CalPERS has reached its capacity to internally manage equities portfolios and would need to make changes to technology and staff resources if the internally-managed equities program is expanded, according to the outcome of the annual consultant review of CalPERS’ internal equity team by Wilshire Associates.

While Wilshire said the internal team should be able to handle any risk or complexity in the portfolio at least as well as any external manager CalPERS might consider instead of internal management, there were considerable technology issues that needed to be addressed, and more staff would most likely have to be added.

CalPERS has 16 internally managed index funds, with a wide variety of target indexes, and Wilshire said as the equity trading desk has expanded in personnel, assets and sophistication it has begun to stretch the limits of CalPERS existing technology and databases. When Eric Baggesen and Dan Bienvenue were first hired to build the internal management capacity, there were only four internal index funds.

It is CalPERS’ intention to grow the internal equity programs, and it intends to facilitate a more scaleable structure by making changes to data, technology and its team, as a result of the review.

With more than $50 billion in internally-managed index funds, CalPERS is one of the largest index managers in the world. In the past year the team has been restructured across three functional lines: strategy, construction and trading. Previously, a single portfolio manager and backup manager handled all aspects of the portfolio, from research to trading.

The new structure allows team members to specialise and provides some increase in capacity as future strategies are added.

Recently one senior person on the portfolio construction side was hired, and there is a search for an additional resource on the trading side.

In a letter to CalPERS’ chief investment officer, Joe Dear, managing director and principal of Wilshire, Michael Schlachter, recommended a number of technology enhancements to solve the problems with the current order management system interfacing with CalPERS’ central database.

The consultant review found that the investment staff had discovered a number of errors in daily pricing of unitised portfolios and in portfolio holdings.

“Part of this is a result of the fact that orders and transactions can be generated through several different systems and partly results from the fact the trading desk is employing State Street for activities which generally exceed the scope of a traditional monthly-valued custodian.”

Wilshire recommended that should the fund continue to use State Street it should extend the arrangement to include the type of services that a traditional funds manager might employ, rather than typical custodian services.

In addition Wilshire pointed out that the internal fixed income team at CalPERS had outsourced the portfolio management system to BlackRock and a wide-open appraisal of the equity team’s needs would also be appropriate.