The California Public Employees’ Retirement System (CalPERS) expects separate accounts to become its primary road to the infrastructure market as it seeks to benefit from the better economic terms and governance these structures typically offer, its investment staff said this week during a review meeting.
CalPERS, the largest public pension fund in the US, anticipates its management fees will decrease as a percentage of total assets under management as its portfolio grows through these new vehicles.
In June, the public pension fund announced its plans to slash the number of external managers it currently employs from 212 to about 100 over the next five years, as part of an effort to reduce the cost, risk and complexity of its portfolio.
Infrastructure and forestland were the exception to that mandate, with the number of external managers expected to increase from six to 10.
“Infrastructure is one of our newer programmes within the asset allocation and we expect to increase the number of managers in that area,” Ted Eliopoulos, CalPERS’ chief investment officer, said during a media call at the time, noting that the pension fund had not yet reached its target allocation for the asset class.
According to the Real Assets Annual Programme Review, which managing investment director for real assets Paul Mouchakkaa and his team presented to the investment committee on Monday, the infrastructure portfolio has climbed from $1.8 billion a year ago to $2.2 billion, representing 0.7 percent of the fund’s $288.1 billion worth of assets.
The pension's long-term target allocation for infrastructure is 2 percent (excluding forestland). However, due to low interest rates and increased competition, both of which it says have driven up valuations, CalPERS has settled on an interim target of 1 percent for the asset class until April 2016.
Launched in August 2008, CalPERS’ infrastructure programme has outperformed across all measured periods, posting net returns of 13.2, 13.7 and 17.8 percent over a one-, three- and five-year period respectively, well above its defined benchmarks.
The strong performance was driven by the programme’s direct investments and commingled funds, Mouchakkaa and his team stated in the annual review.
CalPERS aims to maintain this strong performance and increase deployment of capital into the asset class, whose role it says includes providing long-term inflation protection and portfolio diversification.
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.