Wednesday, February 19, 2014

Investment Developments at CALPERS

Investment Developments at CALPERS

CALPERS announced a series of noteworthy changes in the strategic assumptions for its public pension.  At a time when most public pension plans are reaching for alternative investments, CALPERS is scaling back.  CALPERS was among the first pension plans to invest in alternatives, so they are well positioned to evaluate the efficacy of these asset classes.  Under the revised strategy, their targeted private equity allocation is being scaled back from 14% to 12%, and the commitment to absolute return strategy from 2% to 0%.  They are also reducing global equity from 50% to 47%.  To offset the decreases, CALPERS increased its commitment to real estate from 17% to 19% and fixed income from 9% to 11%.

Since CALPERS is reducing the overall risk of the portfolio, it is also lowering the expected return for the next 10-years from 7.25 % to 7.15% and the expected volatility from 12.45% to 11.76%.  The sixty-year expected return was set at 7.65%.  While the figures look like perfectly reasonable guesses, I don’t understand why CALPERS reported the numbers to the hundredths of a percentage.  It provides a completely false sense of precision.

More importantly, I don’t understand how CALPERS can maintain a target return for actuarial purposes of 7.5% when it is only estimating an annual return of 7.25% over the next decade.  Clearly, employees and employers will be paying more over time.



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