CalPERS Officials Discussing Significant Investment Changes

CalPERS' top executives are considering significantly lowering investments in commodities, individual company stocks and hedge funds as part of efforts to protect the pension fund during future economic downturns, according to individuals familiar with the issue, the Wall Street Journal reports.  

Background

The pension fund is the largest of its kind in the U.S. and manages investments and benefits for 1.6 million current and retired teachers, firefighters and other public employees.

In October 2007, assets managed by CalPERS reached a high of $260 billion. However, during the 2008-2009 recession, such assets fell to $165 billion, and the pension fund has struggled to recover (Fitzpatrick, Wall Street Journal, 8/10). 

In July, an individual familiar with the move said that CalPERS was expected to reduce its hedge fund investments by 40% this year -- bringing such investments to $3 million -- as it moves toward a "back-to-basics approach" (California Healthline, 7/24).

Details of Discussions

According to the Journal, CalPERS Chief Investment Officer Ted Eliopoulos and other investment executives are discussing investment options. However, the CalPERS board has not yet been notified of any changes, and no final decisions have been confirmed.

Individuals familiar with the discussions said officials are considering:

• A complete exit from tradable indexes related to energy, food, metals and other goods;
• How to move forward with the pension fund's $4.5 billion hedge-fund portfolio; and
• Shifting $55 billion in individual company stocks to broader market targets, such as countries or industries.

A top CalPERS executive would not disclose any specific discussion topics but acknowledged that officials are considering whether:

• More-complicated investments are yielding effective returns; and
• Relying on individual trading is effective.

If money is shifted away from higher-risk investments, it is unclear where those funds would be moved, according to the Journal (Wall Street Journal, 8/10).

CalPERS in a statement said that its portfolio continues to evolve but noted that "there is no requirement that changes be made, nor is there a timeline for this process."

According to the Sacramento Business Journal, the investment modifications being discussed "appear consistent" with the pension fund's moves in recent years to reduce risk by shifting away from higher performing investments (Young, Sacramento Business Journal, 8/11).

Implications

Observers say that other pension funds likely would be influenced if CalPERS decides to reduce its riskier investments.

Jean-Pierre Aubry, with Boston College's Center for Retirement Research, said, "When CalPERS makes a decision, it has a ripple effect through the state and local pension community" (Wall Street Journal, 8/10).