Press Release
December 13, 2010
External Affairs Branch
(916) 795-3991
Patricia K. Macht,
Director
Brad Pacheco, Chief, Office of Public Affairs
Contact: Clark
McKinley, Information Officer
pressroom@calpers.ca.gov
CalPERS Adopts Landmark Investment Plan
Focus on Asset Allocation in Different Economic
Conditions
SACRAMENTO, CA – The California Public Employeesf Retirement
System (CalPERS) today adopted a new asset allocation strategy to position the
nationfs largest public pension fund for better
risk-adjusted
performance.
The pension fund will manage its $220 billion portfolio mainly by focusing on
such key drivers of risk and return as economic growth, inflation, liquidity
(availability of cash), and interest rates.
gWe learned in the financial crisis and the past recession that a liquidity
crunch or inflation can have a significant impact on portfolio performance in
ways that many investors didnft anticipate,h said Rob Feckner, CalPERS Board
President. gWe focused on assets and returns, but not enough on the risk of our
allocations. Wefre majoring now on careful study, reaching out to the
best-informed professionals of the financial world and taking all viewpoints
into account.h
Today, after a nearly year-long review, the pension fund changed its
traditional asset allocation structure to better reflect varying market
conditions – for example, the growth and low inflation conditions of the 1990s,
the falling markets and liquidity constraints of the recent recession, and the
rampant inflation of the late 1970s. In each case, growth assets like equities,
high-yield and corporate bonds perform differently in those different scenarios
than inflation hedges like commodities and Treasury inflation-protected
securities (TIPS).
The new allocation plan will place CalPERS assets in five major groups
according to how they function in high- or low-growth markets, and the
prevailing inflation environment. Here are the groups and target allocations as
a share of total CalPERS market value:
-
Liquidity: cash, government bonds like Treasuries that can be quickly
converted to cash to reduce deflation risk and insure against having to sell
assets like real estate and stocks when credit is tight; 4 percent
-
Growth: public equity (stocks) and private equity that provide positive
exposure in rising markets, 63 percent
-
Income: TIPS and other fixed income securities to provide income return
in falling equities markets, 16 percent
-
Real: real estate, infrastructure and forestland to provide long-term
income returns that are less sensitive to inflation risk, 13 percent
-
Inflation: Commodities and inflation-linked bonds that provide protection
against inflation, 4 percent
The Board also set ranges for investing. Relative to each asset class
target allocation, ranges are
+/- 7 percent for growth (public and private
equity); +/- 5 percent for income and real estate; and
+/-3 percent for
inflation and liquidity.
There is no timeline for deploying funds under the new allocations since
investments will depend partly on market trends and opportunities. CalPERS
investment staff will use new risk management tools as they review the asset
allocation mix and shift funds to take advantage of opportunities, depending on
market conditions, keeping close tabs on risks and allocations.
gWhile the allocations wonft change much, wefre going to be looking at these
assets differently than we did before,h said George Diehr, Chair of the CalPERS
Investment Committee. gWe now have a better way to look at risk and account for
whatfs happening in the markets and to re-categorize our assets according to
what drives them. Wefll be able to better anticipate overall performance and its
potential impact on employer contribution rates and our retirement systemfs
funded status.h
Historically, investment earnings have paid 64 cents to 75 cents of every
pension dollar. The remainder comes from employers and active employees.
gYou canft get solid returns without taking risk, but we want to make sure we
know what that risk is and that wefll be paid to take it,h said Joseph Dear,
CalPERS Chief Investment Officer. gWe have applied the best thinking and our
best judgment to the challenging questions about how to uphold the promises we
made to our beneficiaries to make their retirement secure.h
The next step is adoption of CalPERS actuariesf recommendation for an assumed
rate of return on investments, scheduled for early 2011.
CalPERS provides retirement benefits to approximately 1.6 million State and
local public agency employees and their families. For more information about
CalPERS, please visit the Systemfs Web site at www.calpers.ca.gov.
###
Dated: 12-13-2010