Investment staff and four selected consultants expect CalPERS’ returns will be less than the fund’s current 7.75 per cent – a finding on the agenda of a special investment workshop next week, alongside static versus dynamic asset allocation and the use of leveraged bonds.
The investment committee workshop, entitled Capital Market Assumption Review, which is open to the public, will review forecasts of capital market returns that will inform a three-year asset allocation plan to be adopted in December.
A presentation by senior investment officer, Farouki Majeed, highlights that return forecasts are lower and could result in expected portfolio returns lower than the current 7.75 per cent.
“Equity risk premium and private equity premium have been key drivers of the CalPERS portfolio but are forecast to be lower,” Majeed said.
By assessing return expectations for each asset class, provided by four consultants as well as its own staff (see table below), the fund will find that its return expectations form an average of 7.29 per cent.
The presentation also says leveraged bonds could be an option to reduce equity risk and improve returns, depending on risk to bond yields.
In addition, the appropriateness of a strategic tilt towards emerging markets will be discussed.
The workshop panel includes managing directors at Wilshire Associates, Michael Schlachter and Andrew Junkin; the senior vice president and managing director at PCA, John Linder and Allan Emkin; CalPERS asset allocation portfolio manager Lorne Johnson; chief investment officer of First Quadrant, a specialist portfolio management and research firm focusing on equities and global macro, Max Darnell; and partner at GMO Matt Kadar.
Earlier this year, the CalPERS board reviewed the role of the fund’s five asset classes and alternative ways of classifying them.
In July, the board will discuss major risk factors and new approaches to asset allocation. It will hold a final review of market assumptions in September and an Asset/Liability Management Workshop in November 3-4.
The Board could adopt a three-year asset allocation plan as early as the December 13 investment committee meeting.
10-year nominal annual geometric return assumptions using current CalPERS target allocations:
| Wilshire | PCA | Mercer | Callan | CalPERSstaff | Average | |
| Global Fixed Income |
4.25% | 3.70% | 4.98% | 4.50% | 5.55% | 4.60% |
| Nominal Govt bonds | 3.00% | 4.30% | 4.38% | 3.89% | ||
| Corporate bonds | 5.25% | 5.50% | 6.41% | 5.72% | ||
| High yield | 6.00% | 6.40% | 6.10% | 6.93% | 6.36% | |
| TIPS | 3.75% | 4.80% | 4.60% | 4.20% | 5.82% | 4.63% |
| Public equities | 7.75% | 8.00% | 8.70% | 8.60% | 7.50% | 8.11% |
| Private equity(AIM) | 10.00% | 9.40% | 9.50% | 9.65% | 8.50% | 9.41% |
| Real Estate | 7.35% | 6.80% | 7.40% | 6.80% | 7.25% | 7.12% |
| Core | 6.00% | 7.40% | 7.25% | 6.88% | ||
| Opportunistic | 9.88% | 9.20% | 8.25% | 9.11% | ||
| ILAC | 5.85% | 6.06% | 6.08% | 6.04% | 7.53% | 6.31% |
| Infrastructure and Forestland | 7.50% | 7.00% | 7.56% | 7.75% | 8.00% | 7.56% |
| Commodities | 4.50% | 5.35% | 4.60% | 4.40% | 7.88% | 5.35% |
| Market Neutral | 7.75% | 8.00% | 8.70% | 6.10% | 7.00% | 7.51% |
| Cash | 3.00% | 3.50% | 3.40% | 3.00% | 3.50% | 3.28% |
| Inflation | 2.50% | 3.00% | 2.80% | 2.75% | 4.00% | 3.01% |
| Expected Nominal Geometric return | 7.14% | 7.03% | 7.70% | 7.45% | 7.13% | 7.29% |
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