CalPERS to take new real assets approach

The California Public Employees' Retirement System's investment committee yesterday unanimously approved a new five-year real assets strategic plan. 

Investment manager for real assets Mike Inglett said in a brief to the committee that in the infrastructure sector, the focus of changes would be on “modifying existing parameters and standardising nomenclature […] to increase transparency, and reduce risk and complexity”.

The majority of investments will fit into the lowest-risk core bucket (between 60 percent and 100 percent), with up to 25 percent earmarked for both value-add and opportunistic investments. These replace existing risk categories of “defensive”, “defensive plus” and “extended”. Geographically, CalPERS will invest up to 100 percent of the fund in the US, as much as 50 percent in international developed markets, up to 15 percent into international emerging markets, and up to 5 percent in international frontier markets, according to the updated strategy.

After opting to pursue a separate accounts approach in December and carry out a plan from June last year to lower the number of account managers CalPERS employs to 100 from 212, it was decided in yesterday's meeting that the firm would limit itself to a total 10 managers for the infrastructure and forestland sectors. It currently holds relationships with eight managers in the infrastructure sector alone.

Infrastructure investments currently account for $2.37 billion of the fund. These will now be divided into several segments across all real assets sectors, including essential, commercial, retail and international investments. 

In order to give infrastructure more breathing room, the pension has raised its policy floor for the sector to $5 billion from the current benchmark of $3 billion. 

“The reason for the increase is the infrastructure currently has approximately $2.5 billion. Additional flexibility is needed to mirror the increase in proposed core holdings that will be reflected in the updated real asset policy,” Inglett said.

The plan was the product of months of work in a process that began in June 2015, led by director of real assets Paul Mouchakkaa. It coincides with the winding down of legacy asset sales, which when the previous strategic plan was developed in 2011 accounted for 50 percent of investments across CalPERS' entire portfolio, compared to 7 percent currently. 

Mouchakkaa said the plan has three central aims: to “roll up under sectors or segments across the real assets investment universe”, to harmonise the “parameters and nomenclature applied to these segments”, and “to provide the board one overarching real asset investment policy that will codify parameters brought forth”. 

A 10 percent cap will be placed on investment into projects under development. The fund's overall development exposure is currently 14 percent. While the existing loan-to-value ratio of 65 percent will hold for the infrastructure sector, a new debt service coverage ratio is to be established at 1.25 percent.

Environmental, social and governance goals will be a focal point in the coming years, the pension said. CalPERS is “in the early stage of ESG data collection for real assets,” investment manager Beth Richtman noted, and following on an ongoing pilot programme in the real estate sector goals will be aligned across the three real assets buckets and throughout the coming years.  Once this is finalised,” she said, “we will start requesting that the real asset separate account managers fill out [an ESG consideration matrix] and send it to CalPERS every time they acquire a new asset.” 

The fund's internal managers and directors will aim “to improve practices, gather more data, and position [CalPERs] in the longer term to be able to make ESG-intelligent investment and asset management decisions,” Richtman said, will “strengthen the sustainability of [its] portfolio as a whole.” 

Mouchakkaa, Inglett, and Richtman were joined by Pension Consulting Alliance managing directors Christy Fields and David Glickman, StepStone co-head of infrastructure and real assets David Altshuler, and Wilshire Associates Consulting president Andrew Junkin in addressing the committee on Monday.