With CalPERS, the largest US public pension fund, set to formally adopt the reference portfolio for its total portfolio approach next month, chief investment officer Stephen Gilmore is counting on the pivot to bring clearer investment accountability to the organisation.
In one of his first public appearances since he took the top investment job at the $650 billion* investor, Gilmore said at the Top1000funds.com Fiduciary Investors Symposium that his appointment was due to the “appetite for change” from the CalPERS board and its pursuit of a more efficient investment team.
He said that while it wasn’t always clear “who owns” an investment decision in the previous strategic asset allocation process, that is about to change.
“The management team would recommend a strategic asset allocation; the board would typically approve that; then the question is, who owns it? The management team might say the board owns that SAA, and the board will say, ‘well, you recommended it’,” he told the symposium at Harvard University.
“Now with the reference portfolio, I think it’s clearer. We make a recommendation on the reference portfolio, but the board discusses that in terms of the risk appetite.
“The actual portfolio – that’s down to the investment professionals and the management team, so there should be much more accountability as a result.”
CalPERS has adopted a 75/25 equities/bonds reference portfolio, which will come into effect on July 1. It was a part of the bigger shift to TPA, which Gilmore expects will add 50-60 basis points of returns if implemented properly.
Funds that have adopted TPA often nominate the ability to be more tactical and agile as one of its major advantages, but Gilmore said TPA offers something else more important to CalPERS.
“The bulk of it is actually thinking about what’s the overall objective, what’s the cost of capital, where do we allocate capital,” he said.
Some team members initially worried that Gilmore’s TPA push would mirror the NZ Super playbook – the fund he previously oversaw – but Gilmore said the two funds couldn’t be more different.
This includes things like balance sheet management. NZ Super needed a sharp focus on currency hedging and liquidity due to it being a NZ dollar investor investing the bulk of its assets offshore, while CalPERS has the advantage of being a US dollar investor.
Another area is private investments. While NZ Super has limited exposures to private markets, CalPERS has a large unlisted book – which it will continue to maintain – including a 19.5 per cent allocation to private equity.
“The areas that will change will be things like diversifiers in the program. Historically, we’ve focused primarily on fixed income, Treasuries and the like, but we’re looking at broadening out those exposures,” he said.
“We’ve also changed in the sense that we’ve been willing to take more risk, so we have made some changes to the portfolio in anticipation of this move. We will also be taking more active risk in the liquid markets.”
CalPERS can expect a lot of eyeballs on its TPA transformation as it is the first US public pension fund to undertake such an exercise. Among its domestic peers though, views towards the efficacy of TPA are split. While there are others pursuing the approach like Maryland State Retirement, critics such as the Teacher Retirement System of Texas believe the top-down decision-making of TPA is a “brittle process” and question the real value-add of TPA over SAA.
Gilmore said TPA will mean different things for each organisation practising the approach but that for CalPERS it means focusing on fund-level objectives and adapting for different circumstances in the world.
“You can look at a big picture view of the world, but you get a lot of information from the individual investing teams, and you need to have some way of integrating those two views,” he said.
“You need to have some common way, or common language, of thinking about cost of capital, so you can compare everything on this second system basis, and it’s also about collaboration, because you need to have those discussions across teams.”
This month, CalPERS rounded out its senior investment leadership team, appointing head of private equity Anton Orlich to deputy CIO of private markets and nabbing CPP total fund strategist Derek Walker as managing investment director, total fund portfolio management.
Ushering in such a big change process in the largest US public pension institution is a great responsibility, and Gilmore said the best way he stays grounded is by focusing on doing a good job.
“You just have to sit down and just do your job, because if you start thinking about the implications, the magnitude of it can become overwhelming. The aim is to just stick to what you have to do,” he said.
“It’s incumbent upon us to provide more information on why we’re doing certain things… We have been positioning parts of the portfolio ahead of this move, but I wouldn’t look for any fireworks.”
*Including assets from affiliate organisations.