CalPERS boosts infra target

The California Public Employees' Retirement System's (CalPERS) investment committee has unanimously approved a new five-year real assets plan that increases the size of its infrastructure programme.

Infrastructure investments currently account for $2.37 billion of the fund. In order to give the infrastructure sector more breathing room, the policy floor minimum will be raised to $5 billion from the current benchmark of $3 billion. Moving forward, investments will be divided into aligned segments across all real assets sectors. These include essential, commercial, retail and international.

“The reason for the increase is that 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 assets policy,” investment manager for real assets Mike Inglett explained.

Under the new plan, the majority of investments will fit into the lowest-risk core bucket (from 60 up to 100 percent), with up to 25 percent into both value-add and opportunistic investments. These replace existing risk characterisations 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.

Inglett said in a brief to the committee that in the infrastructure sector, the focus of changes was on “modifying existing parameters and standardising nomenclature […] to increase transparency, and reduce risk and complexity”.

After opting to pursue a separate accounts approach in December and carrying out a plan from June 2015 to lower the number of account managers employed from 212 to 100, CalPERS has decided to limit itself to a total of 10 managers for the infrastructure and forestland sectors. It currently maintains relationships with eight managers in the infrastructure sector alone.  

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 with 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 14 percent at the moment. While the existing loan-to-value ratio of 65 percent will hold for the infrastructure sector, a new debt service coverage ratio will be established at 1.25 percent. 

Environmental, social and governance goals will be a focal point in the coming years. CalPERS is “in the early stage of ESG data collection for real assets,” investment manager Beth Richtman said. Following 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 Consulting president Andrew Junkin in addressing the committee.