In its latest proposed five-year plan, the California Public Employees' Retirement System (CalPERS) is looking to further unify its infrastructure, real estate and forestland programmes as part of its broader real assets strategy.
The StepStone Group , in a review of the real assets strategy's effect on CalPERS' infrastructure programme, noted its belief that “the increased integration of component asset classes should help reduce complexity across the real assets unit and investment office”.
CalPERS, which currently holds approximately $290 billion in assets under management as at April 11, first adopted a real assets approach in 2011 as part of its current five-year plan, which includes infrastructure, real estate and forestland. Its infrastructure programme was founded in 2008.
Organisationally, the updated plan creates a new integrated structure comprising five divisions, which are strategic planning, new investments, PARRGO (portfolio, analytics, research, risk, governance and operations), a portfolio management group and investment research. Risk classification would be unified, with investments falling into the three buckets of core, value-add and opportunistic, which StepStone said “should help to clarify the role real assets investments are expected to play in CalPERS' portfolio, especially for the purposes of asset liability management”.
On the risk spectrum, the plan calls for 60 to 100 percent of infrastructure investments to fall into the core category and for up to 25 percent to fall within both the value-add and opportunistic buckets. This would replace the current allocation scheme of 25 to 75 percent falling into defensive investments, 25 to 75 percent into defensive plus, and up to 10 percent into 'extended' investments. The maximum development limit (build-to-core) would be set at 10 percent of total infrastructure allocation.
Infrastructure, which currently accounts for $2.37 billion of the fund, would also be divided into segments traditionally used to define the fund's real estate investments. Infrastructure sub-sectors have been “mapped out” into essential, commercial, retail and international segments, StepStone said, adding that further detail on the use of these segments to categorise infrastructure investments is required, since they have not traditionally been classified in such a way.
The number of infrastructure and forestland manager relationships would be set to a combined total of 10, whereas currently CalPERS maintains eight such relationships for infrastructure alone. The pension also said late last year that its preferred method of investing in infrastructure going forward would be through separate accounts .
“The emphasis on maintaining fewer, larger relationships with external managers is positive and should contribute greatly to a reduction in the complexity and costs associated with CalPERS' investments,” StepStone noted. Still, the firm said that “a cap on the number of manager relationships may limit CalPERS' ability to gain access to top-tier specialists and to maintain a diversified portfolio of infrastructure investments.”
From a geographic viewpoint, CalPERS currently seeks to invest between 40 and 80 percent of its infrastructure allocation into the US, 20 to 50 percent into developed OECD, and up to 15 percent into less-developed jurisdictions. The new strategy calls for 50 to 100 percent of investments to take place in the US, up to 50 percent in international developed markets, a maximum of 15 percent into international emerging markets, and up to 5 percent into international frontier markets.
On the leveraging front, the existing loan-to-value ratio cap of 65 percent would remain in place and a new debt service coverage (DSCR) ratio of 1.25 percent would be established where no DSCR has yet been defined for infrastructure investments.
Other updates to the strategic plan include integrated environmental, social and governance goals and development of sustainable investment practices across the real assets portfolio, which StepStone characterised as “prudent”, positing that they should help to strengthen the programme's focus on risk.
The CalPERS investment committee is set to review the staff-recommended changes to its real assets strategy at its next meeting on 18 April. According to the meeting agenda, managing investment director Paul Mouchakkaa will be joined by Wilshire Associates Consulting president Andrew Junkin, Pension Consulting Alliance managing directors Christy Fields and David Glickman, and StepStone co-head of infrastructure and real assets David Altshuler.