Equity risk still dominates CalPERS portfolio

CalPERS’ 52 per cent asset allocation to global equities accounts for 69 per cent of its total risk allocation, according to the fund’s risk management update to the end of June.

Similarly, the alternative investment management program has a larger risk allocation than its capital allocation – 20 per cent compared with an actual investment allocation of 14 per cent. Fixed income dramatically brings the total risk down, with a 21 per cent asset allocation but 3 per cent total risk allocation.

According to the risk management quarterly update, presented to the investment committee this week, equity risk is estimated at nearly 90 per cent of total risk and remains the most significant risk in the fund’s asset allocation.

The total fund tracking error is 2.05 per cent, above the budgeted 1.5 per cent, but below the March quarter’s 2.46 per cent.

At 13.4 per cent, total risk is 90 basis points below the March quarter level.

The active allocation risk is 0.5 per cent, down from 0.71 per cent the previous quarter. This is primarily due to a reduction in the global equities overweight position from 3.6 to 2.9 per cent.

Liquidity risk also remains a concern for the fund, with the document warning that a sharp correction in risky assets, combined with a credit squeeze, could pose liquidity risks reminiscent of the 2008 financial crisis.

However, the fund has taken a number of steps to minimise this risk, including the implementation of a 4 per cent liquidity portfolio consisting of short- and long-maturity US Treasuries in July this year.

In addition, unfunded commitments in private equity and real estate are nearly half the size of the 2008 levels; and the securities lending reinvestment portfolio is much smaller and has a lower leverage limit compared to the cash collateral.

With regard to risk management, the CalPERS’ investment committee also has plans to complete the testing and go live with its new risk management system, Barra, and conduct a board risk management workshop in the Fall.

Meanwhile, the separate risk management committee, established in April 2011, has produced a “top risk” list across the fund, with the CalPERS Pension System Resumption (PSR) system, and investment controls and systems ranking as the two highest residual risks facing the fund.

The fund is implementing a new CFO function and enhancing investment accounting policies, which among other things aim to mitigate this investment risk.

The PSR – which will replace 49 systems for managing member enrolments, benefits and contributions – is expected to remain a high risk until it is fully implemented. It is already 18 months overdue.

The committee reports that work is also underway to develop quantitative risk measures and a relational database to house the assessments, allowing for real-time reports.

It is also recruiting for new positions in the risk intelligence office.