CalPERS, the California Public Employees' Retirement System headquartered in Sacramento, is contemplating a significant shift in its asset allocation strategy. This prospective change, revealed during the November 13th investment committee meeting, follows a comprehensive asset-liability study completed in 2021.
The $446.7 billion pension fund may adjust its 14-month-old asset allocation to enhance its investment in private markets, simultaneously reducing its stake in equities and fixed income.
In March, CalPERS is expected to consider an asset allocation proposal designed to increase private equity investment by 4 percentage points, bringing it to 17%. This shift would be offset by a 5 percentage point reduction in equities, which would then represent 37% of the portfolio.
Additionally, the proposal suggests augmenting private debt by 3 percentage points to reach 8%, while scaling back fixed income by 2 percentage points to 28%.The allocation to real assets would remain constant at 15%, with total portfolio leverage maintaining a steady 5%.
Dan Bienvenue, CalPERS’ Interim Chief Investment Officer, communicated to the committee that this new allocation strategy aims to expand the fund's engagement with private markets while cautiously increasing its fixed income exposure. The staff now views private debt as a key component of their fixed income strategy.
Sterling Gunn, the Managing Investment Director for Total Fund Portfolio Management, reflected on the constraints faced during the 2021 asset allocation decision. He revealed that if not for these limitations, the staff would have advocated for a larger private equity component at that time. Additionally, changes in market dynamics have made fixed income investments more appealing than they appeared in 2021.
Bienvenue also discussed the "denominator effect," where lower equity returns and the slower valuation adjustments in private markets have brought private market portfolios closer to their target allocations.
Theresa Taylor, Board President, highlighted that this would be the first time since 2015 that CalPERS considered altering its asset allocation outside of a scheduled asset-liability study. Bienvenue responded, indicating that nearing maximum private market allocations and the risk of over allocation in the event of another equity downturn were key motivators for this proposal.
As of September 30, CalPERS’ investments in real assets slightly exceeded its target, while private equity was above and private debt below their respective targets.
In a separate discussion, the board addressed concerns raised during a public comment period about labor practices at hotels operated by Aimbridge Hospitality, a portfolio company of Advent International in which CalPERS is an investor. Workers, including recent migrants and asylum seekers, reported exploitative practices, including inadequate training, insufficient breaks, and unclear payment terms.
Lisa Middleton, a CalPERS board member, emphasized the importance of aligning investments with CalPERS' values, particularly as the fund increases its stake in private equity. She stressed the need for vigilance in ensuring that investment partners reflect the fund's commitment to ethical labor practices and long-term values.
In response to these concerns, an Advent International spokesperson assured that Aimbridge upholds the highest standards in safety and guest experience, including compliance with employment and labor laws. They emphasized the company’s reliance on third-party temporary labor providers for critical staffing needs and their commitment to ensuring these partners adhere to necessary policies and regulations.
