Allocation Gambit

Calpers Needs to Think a Few Moves Ahead

The pension plan has shown it can sell stocks high. What happens after that gets tricky.
Photographer: Sebastian Reuter/Getty Images for World Chess by Agon Limited

The largest U.S. pension fund, the California Public Employees’ Retirement System, is chasing investing’s holy grail: Buy low and sell high.

Calpers is considering whether to reduce its stock allocation to as little as 34 percent from 50 percent and discussed it at a board workshop on Nov. 13.

The temptation to lighten up on stocks is understandable. The MSCI ACWI IMI Index -- a collection of large-, mid- and small-cap companies from around the world -- is up 40.2 percent since its low in February 2016 through October, including dividends. That’s well above the index’s average 20-month return of 14.7 percent since inception in June 1994.

One Way

Global stocks have marched higher since February 2016

Source: Bloomberg

Calpers is no stranger to market timing. The pension fund had $91 billion invested in global stocks at the end of fiscal year 2001 -- the earliest year for which numbers are available. Untouched, that investment would have grown to roughly $217 billion at the end of fiscal year 2016, which reflects the ACWI IMI index’s annual return of 6 percent over those 15 years.

Taking Stock

Calpers was more defensively postured in 2016 than it had been 15 years earlier

Source: Bloomberg

Instead, Calpers had just $142 billion in stocks when 2016 ended. What happened during those 15 years demonstrates the difficulty in making the right calls in the heat of the moment. 

Elusive Timing

Calpers has had mixed results from market timing

Sources: Bloomberg, author's calculations

Note: Do-nothing portfolio based on total returns for MSCI ACWI IMI Index.

At first, everything went according to plan. The ACWI IMI index declined 12.7 percent in fiscal year 2002 and 0.6 percent in 2003. Calpers scooped up stocks. The pension fund ended 2003 with $86 billion in stocks, which was roughly $7 billion more than it would have had otherwise.   

When stocks turned higher the next year, Calpers reversed course. The ACWI IMI index returned 20.8 percent annually from 2004 to 2007. Calpers unloaded some of its stocks. It ended 2007 with $150 billion in stocks, which was roughly $34 billion less than it would have had.  

Those shrewd maneuvers paid off. Its stock portfolio returned 11.7 percent annually during fiscal years 2002 to 2007, whereas, based on the performance of the ACWI IMI index over that period, a do-nothing approach would have returned 10.8 percent.

But everyone has a plan until they get punched in the mouth, as Mike Tyson once said, and Calpers’s was upended when the 2008 financial crisis hit. The ACWI IMI Index tumbled 9.4 percent in fiscal year 2008 and 28.4 percent in 2009. This time Calpers was among the sellers. It ended 2009 with $80 billion in stocks, which is roughly $17 billion less than it would have had otherwise.

Off Course

Calpers's market-timing strategy was derailed during the financial crisis

Sources: Bloomberg, author's calculations

The trouble with selling when markets are down is knowing when to get back in. Calpers watched from the sidelines as the crisis passed and the ACWI IMI Index returned 13.6 percent in fiscal year 2010.  

And it paid for those missteps. Calpers’s stock portfolio was down 10.8 percent annually during fiscal years 2008 to 2010, compared with down 9.7 percent had it simply ignored the market. That shortfall all but erased Calpers’s market-timing gains from the earlier period.

To its credit, Calpers got back on track. The pension fund sold stocks in fiscal year 2011 when the ACWI IMI index returned 31.6 percent, and it bought them the next year when the index was down 6.4 percent.

Calpers also sold some stocks in each of the ensuing four years as global stocks moved higher. It sold roughly a net $21 billion in stocks from 2011 to 2016, which earned it an excess return of 0.4 percent a year over that period.

High Times

Global stocks are up more than usual since the lows of February 2016

Sources: MSCI, author's calculations

Still, the move Calpers is now contemplating dwarfs any previous ones. The pension fund oversees $342.5 billion as of Nov. 10. Reducing its stock allocation by 16 percentage points would mean dumping $55 billion worth of stocks. The most Calpers unloaded in any fiscal year from 2002 to 2016 was roughly $14 billion just before the financial crisis in 2007.

That shows Calpers can sell high. But the question is how it will react the next time the market tumbles. With the bull market in its ninth year, Calpers should consider carefully not only its next move but the more difficult one after that.

(Corrects the date of a Calpers board workshop in the second sentence.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nir Kaissar in New York at

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    Daniel Niemi at

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