Will Cal Pers Lead A Parade Down Wall Street?by
Call it a shot in the arm for stocks. Last month, the California Public Employees' Retirement System (CalPERS) quietly voted to increase its equity investments from 49% of its $80 billion fund to 63%--well above the level of its most aggressive peers. Bond investments are expected to drop to 30% from 43%. That huge swing represents an $11 billion vote of confidence in the stock market.
The objective is simple: higher long-term returns. By cutting back on fixed income and loading up on domestic and international stocks, CalPERS figures it can increase its return by about $800 million a year. For the 12 months ended on Sept. 30, CalPERS' total return on assets was 0.7%; the average for public funds in that period was -0.6%, according to researcher Callan Associates Inc. "It's an opportunity for us to use our size to enhance diversification and get a better return," says Kevin Morrill, administrative manager of CalPERS' investment office.
The change won't take place overnight. The pension fund plans to make steady investments in equities over the next three years using a technique called dollar-cost averaging and plans to buy on market dips. Even so, CalPERS' action seems likely to spark imitators in the normally staid public-pension world. "Inevitably, others are going to say that this is significant, let's find out why they're doing it and see if we should do something similar," says D. Don Ezra, managing director at retirement consultant Frank Russell Co. "At the least, it ought to prompt some thinking."
For now, CalPERS' big bet makes it one of the most aggressive pension funds around. According to Greenwich Associates Inc., the average public fund has just 49% of its assets in equities. In time, CalPERS should surpass even the equity allocation of less conservative corporate funds, which on average keep 60% of their funds in stocks. "It's a very gutsy move," says Steven H. Nagourney, chief global strategist for Lehman Brothers Inc. "They're setting up their portfolio for a new world order."
NEW VIEW. The force behind the bold move: Sheryl Pressler, CalPERS' new chief investment officer. Hired last spring from McDonnell Douglas Corp., she brings strategies from the corporate world to the state fund. The new CIO's investment plan was supported by reports from two well-regarded consultants, Wilshire Associates Inc. and Pension Consulting Alliance. Neither returned calls for comment.
While CalPERS is hiking its allocation in domestic stocks, the fund's percentage of international stocks is getting the biggest boost. CalPERS aims to have foreign equities account for 20% of assets by 1997, from 12% today--far higher even than most corporate investors. Wilshire Associates, in an October memorandum, recommended that CalPERS invest in South Africa and Korea. "Wherever markets decline, we will be purchasing," says Morrill. Some 20 investment managers, among them Nomura Capital Management Inc. and State Street Global Advisors, advise the fund on international equities.
For pension funds with shorter investment horizons, mimicking CalPERS' higher-risk move may not be wise. But for funds with long-term horizons, the increased returns from equities should more than outweigh increased risks. "By the time everyone else catches on, CalPERS' returns will be much higher," says Lehman's Nagourney. And that would put CalPERS even further ahead of the pack.