CalPERS to increase number of external infra managers

The pension fund expects to increase the number of external managers for its infrastructure and forestland portfolios from six to 10 over the next five years.

Infrastructure and forestland are the exceptions to the restructuring the California Public Employees Retirement System (CalPERS) has undertaken as it looks to reduce the cost, risk and complexity of its portfolio by reducing the number of direct relationships with external money managers from 212 to about 100.

On the contrary, the pension fund expects to increase the number of external managers overseeing its infrastructure and forestland portfolios to about 10 from six currently.

“Infrastructure is one of our newer programmes within the asset allocation and we expect to increase the number of managers in that area,” CalPERS’s chief investment officer Ted Eliopoulos said during a media call on Monday, adding that the pension fund has not yet reached its target allocation for the asset class.

Another reason is that after reviewing the pension fund’s internal capacities and the resources needed to execute the business strategies already in place, CalPERS concluded that it needs approximately 10 managers to oversee these two programmes.

CalPERS announced the creation of its infrastructure programme in August 2008, allocating 3 percent of its total assets to infrastructure and forestland investments. In May 2014, the pension fund adopted a lower interim target of 2 percent, which it decided to lock in place for one more year this past April, due to low interest rates and high valuations.

As of June 2, CalPERS’s forestland portfolio was valued at $2.3 billion and infrastructure at $2.1 billion, representing 0.8 percent and 0.7 percent of the pension fund’s $300 billion portfolio, respectively.

“CalPERS has been on a multi-year restructuring effort on many fronts, including with respect to our relationships with external managers,” Eliopoulos explained. “Today, as a result of this restructuring over the past eight years, we have fewer, more strategic relationships and have improved our manager selection and oversight and reduced costs in the portfolio, while generating the returns for our portfolio that we need,” he said.

According to a report presented by chief operating investment officer (COIO) Wylie Tollette last April, the pension fund has managed to reduce costs by approximately $90 million for the five-year fiscal period between 2009 and 2014. During fiscal year 2013-2014, CalPERS spent $1.7 billion to manage its portfolio. According to Tollette, external management fees accounted for 92 percent of that total.

At the time, CalPERS said that it would continue to monitor and manage costs through various means including increasing flexibility to manage the use of external versus internal resources.

On Monday, June 15, Eliopoulos will discuss with the CalPERS board the next step in this on-going restructuring of the number of external managers. “After the review by the senior management team here in the investment office and based on our review and analysis, we believe that we’re best positioned to manage about 100 external direct relationships over the next five-year period,” he said.

Private equity is the asset class that is expected to see the greatest reduction in external direct relationships, going from about 100 today to 30 by 2020.

Asked whether this was part of an effort by CalPERS to cover its increasing retirement costs, Eliopoulos replied: “The strategy is really targeted towards reducing the amount of cost and complexity in the portfolio but at the same time acknowledging that CalPERS is entering into a negative cash flow environment going forward where benefit payments, just as of this fiscal year […] are now greater than the sum of our contributions and investment income, which makes it even more crucial and critical that we minimise costs going forward and have very strategic, meaningful relationships that scale with the managers that we need access to.”

However, Eliopoulos stressed that while CalPERS would be reducing the number of external managers it employs to manage its portfolio it will not sever or cut ties with any managers. “We will be, as we’ve always done, managing our existing portfolio to its natural conclusion looking to maximise and optimise our returns.”

Finally, CalPERS will be using its existing processes for identifying and evaluating the external managers it will ultimately select to help oversee its portfolio, taking into consideration a fund manager’s track record and performance as well as each programme’s role and strategy needs within the overall CalPERS portfolio.

Based in Sacramento, CalPERS administers health and retirement benefits on behalf of 3,089 public school, local agency and state employers. The institution counts more than 1.7 million members in its retirement system and more than 1.3 million in its health plans. It is the largest public pension fund in the US.