CalPERS officially alters asset allocation, reduces discretionary ranges

The $183 billion CalPERS board has made the first formal changes to its asset allocation targets since January 2008, increasing exposures to private equity and cash, and narrowing the discretionary ranges around all asset classes set in December last year.

The new asset allocation, which sees the target allocation for its Alternative Investment Management (AIM) program, or private equity, increased from 10 to 14 per cent, global fixed income increased from 19 to 20 per cent, and cash increased from 0 to 2 per cent, is a short-term adjustment to the portfolio in the wake of the financial market crisis with the board planning to follow it with a more full-blown asset allocation and liability analysis in autumn next year.

According to George Diehr, chair of the CalPERS investment committee, these changes are not intended to be a long-range strategy but reflect a preference for higher liquidity and moderate risk, as well as the flexibility to respond to challenges and opportunities in the markets.

“Our investment officers will follow these guidelines as we position ourselves for short-term investment opportunities over the next year or so,” he said.

In its investment committee meeting this week, the board also formally reduced global equity from 56 to 49 per cent, with the target allocations for real estate and inflation-linked assets unchanged, at 10 per cent and 5 per cent, respectively.

In addition the discretionary investment ranges around three targets were narrowed for all asset classes mostly because of declining market volatility and improving liquidity. It set ranges of plus or minus 5 per cent around targets for global equity, AIM, fixed income and real estate; and ranges of 2 to 5 per cent for inflation-linked assets and 0 to 5 per cent for cash.

In December CalPERS had previously set new discretionary allocations around its policy targets expanding the range to plus or minus 15 per cent for global equities and global fixed income, 8 per cent for AIM, 5 per cent for real estate, 0-10 per cent for cash, and 0-5 per cent for inflation-linked assets.

The new discretionary targets reduce those ranges quite significantly, particularly for global equities and fixed income.

The pension fund plans to follow up this mid-course adjustment with a more full-blown asset allocation and liability analysis that is tentatively scheduled for autumn 2010 and to take effect in 2011 through 2013.