As the US’s largest public pension fund, managing north of $500 billion-worth of assets, California Public Employees Retirement System has served as somewhat of a bellwether for pension funds across the country. Could the pension fund now be changing the standard of portfolio construction in the US?
During its November 18 meeting, CalPERS’ new chief investment officer, Stephen Gilmore, introduced to the board the concept of a “total portfolio approach”, a method of constructing a portfolio that would eliminate the need for traditional strategic asset allocation.
The total portfolio approach would aim to provide a more holistic and unified approach to both risk and benchmarking, eliminating the silos between asset classes.
Specifically, when looking at risk, Gilmore highlighted that the new approach could unlock a significant amount of potential for CalPERS where they have maybe been leaving long-term returns on the table.
“We have quite a bit of latitude to take down risk or increase risk,” Gilmore said during Monday’s meeting. “The reality is we don’t take that latitude. We tend to stick very closely to the benchmark. Conceptually, we can move the risk quite a bit.”
While the latest meeting was purely informational and any formal recommendations would be months away, the prospect of a new portfolio construction method could have seismic implications for both CalPERS and pension funds across the country.
While the total portfolio approach has been adopted across the globe, with institutional investors in Canada, Australia, Singapore and New Zealand (Gilmore was hired from NZ Super) utilizing the strategy, it has not taken a hold in the US in the same way.
US pension funds have largely stuck to the familiarity of a strategic asset allocation structure, avoiding the larger institutional overhaul that could come with the adoption of a total portfolio approach.
MSCI, following its institutional investor forum earlier this month, wrote a report detailing that US funds are becoming more drawn to a total portfolio approach, “reflecting the rise of greater investment complexity and ‘black swan’ risk”.
Communication and a more hybrid total portfolio approach could be pivotal to success in the US, MSCI’s report noted. Some newcomers to the approach have used asset-class specialist investment teams to collaborate with total-return teams to build dialogue and communicate with board members who might not be investment professionals.
It remains unclear how CalPERS’ adoption of this new strategy would affect its overall portfolio composition. While typically funds that have adopted the total portfolio approach have prioritized the long-term returns of the private markets, this is not always the case and can vary, as is the nature of a more bespoke structure. What it will mean is cultural shift in the operations of the US’s largest public pension fund.
“The high level [of a total portfolio approach] is about focusing on the funded goals,” Gilmore states. “It is about having that competition and capital across the portfolio but having collaborations. It is about having a common language, and it is about having the analytics and the data and visibility to be able do that.”
As the US’s largest public pension fund, managing north of $500 billion-worth of assets, California Public Employees Retirement System has served as somewhat of a bellwether for pension funds across the country. Could the pension fund now be changing the standard of portfolio construction in the US?
During its November 18 meeting, CalPERS’ new chief investment officer, Stephen Gilmore, introduced to the board the concept of a “total portfolio approach”, a method of constructing a portfolio that would eliminate the need for traditional strategic asset allocation.
The total portfolio approach would aim to provide a more holistic and unified approach to both risk and benchmarking, eliminating the silos between asset classes.
Specifically, when looking at risk, Gilmore highlighted that the new approach could unlock a significant amount of potential for CalPERS where they have maybe been leaving long-term returns on the table.
“We have quite a bit of latitude to take down risk or increase risk,” Gilmore said during Monday’s meeting. “The reality is we don’t take that latitude. We tend to stick very closely to the benchmark. Conceptually, we can move the risk quite a bit.”
While the latest meeting was purely informational and any formal recommendations would be months away, the prospect of a new portfolio construction method could have seismic implications for both CalPERS and pension funds across the country.
While the total portfolio approach has been adopted across the globe, with institutional investors in Canada, Australia, Singapore and New Zealand (Gilmore was hired from NZ Super) utilizing the strategy, it has not taken a hold in the US in the same way.
US pension funds have largely stuck to the familiarity of a strategic asset allocation structure, avoiding the larger institutional overhaul that could come with the adoption of a total portfolio approach.
MSCI, following its institutional investor forum earlier this month, wrote a report detailing that US funds are becoming more drawn to a total portfolio approach, “reflecting the rise of greater investment complexity and ‘black swan’ risk”.
Communication and a more hybrid total portfolio approach could be pivotal to success in the US, MSCI’s report noted. Some newcomers to the approach have used asset-class specialist investment teams to collaborate with total-return teams to build dialogue and communicate with board members who might not be investment professionals.
It remains unclear how CalPERS’ adoption of this new strategy would affect its overall portfolio composition. While typically funds that have adopted the total portfolio approach have prioritized the long-term returns of the private markets, this is not always the case and can vary, as is the nature of a more bespoke structure. What it will mean is cultural shift in the operations of the US’s largest public pension fund.
“The high level [of a total portfolio approach] is about focusing on the funded goals,” Gilmore states. “It is about having that competition and capital across the portfolio but having collaborations. It is about having a common language, and it is about having the analytics and the data and visibility to be able do that.”