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CalPERS Tweaks Approach To Risk

The California Public Employees’ Retirement System is tweaking its asset allocation strategy, reducing its allocation to fixed income and boosting its allocations to highly liquid and inflation-linked assets, as a way to improve the risk-adjusted performance of its $220 billion-asset fund.

Administrators of the nation’s largest public pension fund are betting the new approach will improve returns not only during economic crises like the recent credit crunch, but also under a variety of economic scenarios.

CalPERS plans to hold its private equity allocation steady at around 14 percent of its total portfolio, CalPERS spokesman Clark McKinley said. “Generally, private equity is performing well for us and we have no expectation of a major change.”

CalPERS, as a trailblazer in investment management, could help set the environment for other institutional investors. In the past year, the agency has begun to wring fee concessions out of some of the buyout industry’s giants, including a $125 million concession from Apollo Management LP for certain separate managed accounts, and has tightened its rules for dealing with placement agents.

After a year-long review,CalPERS’s investment committee adopted the new risk management tools in December, using economic models to show how the portfolio will perform in different economic environments, focusing on drivers of risk and return including economic growth, inflation, liquidity and interest rates, Joseph Dear, the agency’s chief investment officer, told the committee, according to a transcript of the meeting. “So we’re just getting started on an improved approach.”

The biggest change is to provide more liquidity to the plan’s portfolio. The board decided to double the fund’s allocation to Treasury securities to 4.0 percent of the portfolio and to triple the allocation to inflation-linked bonds to 3.0 percent. The board decided to raise fractionally the allocations to public equities, infrastructure and forestland. By contrast, the board cut the allocation to fixed income by more than a fifth, to 15.9 percent of the portolio from 20 percent.

The agency has no deadline for putting funds to work under the new allocations; CalPERS said its investment decisions depend on market trends and opportunities.

Although the allocations may change little, the investing philosophy is changing, to view assets differently than the agency did in the past, said George Diehr, chair of the CalPERS investment committee, in a prepared statement. “We’ll be able to better anticipate overall performance and its potential impact on employer contribution rates and our retirement system’s funded status.”