New CalPERS CIO and his innovative approach

Could a 'Total Portfolio Approach' model come to the nation's largest pension system?

Incoming CalPERS CIO Stephen Gilmore has spent several years leading an asset allocation strategy markedly different from those followed by US public pension systems, and one that has gained buzz after a recent publication from CAIA touting it.

Gilmore’s previous employer NZ Super uses a “Total Portfolio Approach” model in its portfolio construction. This method shies away from the rigid target-based strategic asset allocation strategy common to US institutional investors.

Instead, TPA considers how individual assets fit into the overall portfolio as opposed to one believed to be the best opportunity for a specific asset class available at that point in time.

CAIA Organization spotlighted the benefits of TPA in a publication released last month (and rapidly spread around my LinkedIn feed), which included an article penned by NZ Super’s head of asset allocation Charles Hyde.

“TPA starts from the premise that it’s impossible to know what investment opportunities will present themselves over time. Therefore, it’s suboptimal to rigidly tie portfolio construction to strategic allocations,” Hyde wrote.

This philosophy lets NZ Super focus on making investment decisions based on its risk tolerance, something that can get missed in the siloed approach common to US public pensions.

“Consideration of whether to invest in a toll road shouldn’t be based on whether that’s the best investment opportunity that the infrastructure or real asset team can identify – even if the current allocation to real assets is below its strategic allocation… After all, why not instead allocate the marginal dollar of capital to a global macro manager if this is expected to deliver a more attractive total portfolio,” Hyde wrote.

It’s not yet known if Gilmore will seek to use this approach at CalPERS, which would require a major philosophical overhaul at a system not known for quickly changing strategic directions.

However, former CIO Nicole Musicco implemented a similar process when she was still at CalPERS.

She created an internal underwriting committee where the head of every asset class debated potential investment opportunities over a certain amount. This allows for a conversation among the system’s staff to discuss broad industry and economic trends along with the specifics of managers and their investments when considering commitments.

“If we’re looking at an opportunity in private equity, but we happen to have real bench strength on the sector we’re considering sitting in fixed income or in private credit, why wouldn’t we bring that knowledge and insight to bear in the debate,” Musicco said at a CalPERS investment committee meeting last year.

If the biggest US pension plan does institute these types of changes, and they work, we could see a big shift in how commitment dollars are allocated.

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