The California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the US, is aiming to invest 3 percent of its $283.4 billion portfolio in infrastructure and timber, increasing the target from 2 percent previously, after the fund’s investment committee (IC) adopted a new asset allocation profile.
The investment committee also decided to increase its target for real estate – the other component to the fund’s real assets category – to 11 percent from 9 percent.
CalPERS’ investment staff presented the investment committee with three scenarios recommending “Portfolio A”, which the investment committee adopted.
“The staff recommendation (Portfolio A) attempts to reduce expected volatility and ‘growth’ related risk concentration to the extent possible while maintaining the existing discount rate,” according to board meeting minutes posted on CalPERS’ website.
While the new target allocation maintains the current 7.5 percent discount rate, the expected rate of return over one to 10 years is slightly lower at 7.15 percent from 7.25 percent currently. However, expected volatility is significantly reduced to 11.76 percent from 12.45 percent.
In addition to the investment staff’s input, the investment committee also sought the advice of investment consultants Pension Consulting Alliance (PCA) and Wilshire Associates.
PCA said it supported “the staff’s recommendation to select the ‘Portfolio A’ option,” in a letter addressed to investment committee chairman Henry Jones.
In a separate letter, Wilshire recommended the selection of option A or B, but expressed reservations about CalPERS’ ability to achieve the higher targets set for real estate and infrastructure.
As of October 31, CalPERS had invested $3.4 billion in infrastructure/timber representing 1 percent of its total assets under management, which at that time stood at $277.2 billion. As of February 20, the pension fund's assets totalled $283.4 billion.
The new target allocations go into effect July 1, CalPERS’ new fiscal year.
Based in Sacramento, CalPERS administers health and retirement benefits on behalf of 3,089 public school, local agency and state employers. Members number more than 1.7 million in the CalPERS retirement system and more than 1.3 million in its health plans.