CalPERS increases alternatives allocations

The largest US pension fund has approved an increase to private equity, which will now be allocated 10 percent of CalPERS’ $250 billion portfolio.

The California Public Employees’ Retirement System has approved a new mix of asset allocations, which include increasing its private equity target from 6 percent to 10 percent. The change will be counterbalanced by a decrease in allocations to publicly traded equities, which will now constitute 56 percent of the pension’s $250 billion portfolio.

These revised allocation markers reflect the promise of our private equity, real estate, and asset-linked investment classes.

Charles Valdes

The US’ largest pension fund has also increased its real estate allocation to 10 percent from 8 percent, while its new inflation-linked assets bucket will have a 5 percent allocation. Offsetting these changes are a decrease in the target allocation of fixed income investments, which will now constitute 19 percent rather than 26 percent.

“These revised allocation markers reflect the promise of our private equity, real estate, and asset-linked investment classes,” Charles Valdes, investment committee chair, said in a statement. “By hitting the reset button every few years, we keep our portfolio balanced and diversified in a fluid market that never stands still.”

The pension's private equity and real estate classes are consistently its top performers, a CalPERS spokesman told PEO. He noted that for the year ended 30 September private equity returned 30 percent.

He said that CalPERS sees abundant opportunities in the private equity market, and particularly hopes to increase its investments with fund managers doing deals abroad.

CalPERS launched the inflation-linked asset class earlier this year as a pilot programme with four components: commodities, timber, inflation-linked bonds and infrastructure. The asset class is now a permanent part of the portfolio, enabling CalPERS to take advantage of opportunities in the energy and natural resources markets.

“This keeps us abreast of what we see as a big market shift in energy-related investments,” the spokesman said.

He compared demand for energy-related investments today to the dramatic upsurge in demand for high tech investments in the 1990s. CalPERS expects the asset class, which will serve as a hedge against downturns in the public equities markets, to generate real returns of 5 percent annually.

The new allocations are a part of CalPERS' broader restructuring of its portfolio.

“We're enabling our staff to focus more on the top end of the market, the big firms, while also bringing out investment vehicles for the smaller end of the market,” the spokesman said.

CalPERS said despite theses changes to its investment strategy, it will continue to target two thirds or 66 percent of its portfolio to public and private equities combined.

The pension expects to deploy capital based upon the newly approved allocation targets over the next two to three years, at which point it will likely review its allocations again.

CalPERS also set ranges for investment relative to asset class allocation; private equity has a range of +/- 5 percent, while real estate has a range of +/- 3 percent and inflation-linked assets will make up zero to 5 percent of its portfolio, the pension said.

Jennifer Harris contributed to this report.