Buoyed by strong stock market performance in 2013, the California Public Employees’ Retirement System, commonly referred to as CalPERS, delivered annual returns of 16.2%, its best number in a decade. The S&P 500 index, by contrast, was up 29.6% in 2013, its best year since 1997.
In the pension fund’s $282.6 billion investment portfolio, publicly traded stocks performed the best in 2013 while bonds and commodities performed the worst. Real estate, which suffered deep losses during the recession and its aftermath, grew 11.7%, while investments in infrastructure jumped 11.2%. Bond investments lost 4%, and commodities lost 4.75%, according to a report in the Los Angeles Times.
Change in hedge fund allocation strategy for CalPERS
In early 2013 CalPERS revamped its $5.2 billion allocation to hedge funds. Egidio G. “Ed” Robertiello, senior portfolio manager of absolute-return strategies, made significant changes, including reduction of the allocation towards long / short hedge funds from 70% to 30% and generally focused on strategies less correlated to the equity markets. Such a strategy is designed to mitigate losses if the stock market experiences losses, as was the case in 2008, when the CalPERS portfolio was significantly correlated to equity market returns and lost 27.8% of its value. The CalPERS board of directors has mandated that overall risk be reduced by creating a diversified portfolio not entirely correlated to the stock market.
Move away from fund of funds reduced fees
A major operational change Robertiello instituted was a move from co-mingled fund of fund investments into direct, separate account investments. This resulted in lower fees, increased transparency and a better day-to-day understanding of position risk. Other programs that Mr. Robertiello is proposing include increasing CalPERS exposure to hedge funds and limiting the beta exposure to 0.20 to global equity markets, according to a report in Pensions and Investments.
CalPERS was initially started in 1931 and changed its original name State Employees Retirement System (SERS) to the current name in 1992 so as not to be confused with other state’s pension funds. Calpers currently serves 1.7 million California state and local government workers by investing their retirement funds. The pension fund was the center of attention when, in 1991, then Governor Pete Wilson attempted to use CalPERS pension funds to cover the state’s budget deficit, a move that was defeated and ultimately cemented the pension fund as the sole and exclusive fiduciary responsible for asset management. Joseph Dear is the current Chief Investment Officer of CalPERS, having stated in 2009 after the departure of Russell Read.