The largest U.S. public pension plan is considering a
dramatic retreat from some riskier investments, as it tries to simplify its
$295 billion in holdings and better protect against losses during the next
market downturn. California Public Employees' Retirement System is weighing
whether to exit or substantially reduce bets on commodities, actively managed
company stocks and hedge funds.
The pension, which manages investments and benefits for 1.6
million current and retired teachers, firefighters and other public employees,
is a bellwether for investment trends at other public plans. Any shift it makes
will likely influence others because of its size and history as an early
adopter of alternatives to stocks and bonds.
The potential moves would constitute a major strategy change
for a pioneer of public investments in so-called alternative assets. It isn't
clear where Calpers would shift money pulled from these investments. It also
could mean a reduction in external managers who are paid millions of dollars to
make these bets for Calpers.
Calpers only had enough assets to cover 76% of guaranteed
benefits to retirees as of June 30. The Sacramento-based retirement system is
wrestling with how much risk it should take as it follows one of its best
performances since the financial crisis. The fund reported investment gains of
18.4% for the fiscal year ended June 30. That exceeded internal goals as
domestic and international equities rose nearly 25%, real estate was up 14% and
private equity increased 20%.
Until somewhat recently, Calpers was among the first to
invest heavily in real estate in the 1990s and then hedge funds and private
equity in the early 2000s. By October 2007, Calpers's assets hit a pre crisis
high of $260 billion. During the financial crisis of 2008-2009, they dropped to
$165 billion as some of those alternative investments didn't perform as
expected, particularly real estate and private equity.
Just one bad year can have serious consequences, since
Calpers has to request more money from municipalities if its investments
decline in value, and cash-strapped cities then are forced to cut services or
raise taxes to cover the bill. One of the more-dramatic moves under
consideration is a complete pullback from tradable indexes tied to energy,
food, metals and other commodities.
Executives on Calpers's investment staff are debating
whether it would be better to shift $55 billion it currently invests in
individual company stocks and link those investments to broader market targets
such as industries or countries.
Another topic of discussion is what to do with Calpers's
$4.5 billion hedge-fund portfolio, which amounted to 1.5% of the pension plan's
total holdings as of June 30. The Wall Street Journal reported last month that
Calpers already is reducing its hedge-fund stake.
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