One of the World's Biggest Funds Is Slashing Its Exposure to Stocks

Updated on
  • Largest U.S. pension may reduce returns as well as volatility
  • Higher contributions could irk agencies already ‘screaming’

The California Public Employees’ Retirement System, the largest U.S. pension fund, is considering more than doubling its bond allocation to reduce risk and volatility as the stock bull market approaches nine years.

Calpers is looking at a menu of options for its fixed-income target ranging from the current 19 percent to as much as 44 percent, according to a presentation for a board workshop in Sacramento coming up Monday. Equities could be cut to as little as 34 percent from 50 percent. Stocks were the best-performing asset class in fiscal 2017, returning almost 20 percent.

“The markets have had a pretty good run and it’s possible Calpers staff is thinking this might be a good time to lock in some of the gains,” Keith Brainard, research director for the National Association of State Retirement Administrators, said in a phone interview.

Calpers oversaw $342.5 billion in assets as of Nov. 10, up about 13 percent this calendar year on a combination of returns and contributions from employees and taxpayers. The fund lost money in past bear markets, including about 25 percent in the 12 months through June 2009 and 7 percent in fiscal 2001.

Bond yields remain at low levels because of persistent weak inflation, central bank easy money policies and global investors chasing income. Raising the allocation would reduce the fund’s discount rate, or average expected return, to 6.5 percent from the 7 percent annual target adopted last year. A lower target would probably require bigger contributions from taxpayers and public agencies to cover pension obligations, a shift that board member JJ Jelincic said he would oppose.

Screaming Employers

“We’ve cut the return expectation to the point that employers are screaming, ‘We can’t afford it. We can’t afford it,’ ” Jelincic said. “I personally would be willing to take on a little more risk.”

The average allocation for public pensions is about 23 percent to fixed income and 49 percent to stocks, according to Nasra data.

“We consider any of those portfolio mixes to be implementable and potentially prudent portfolios, although they’re not necessarily all we would say equally advisable given the externalities,” Eric Baggesen, managing investment director, told the board Monday, referring to the potential impact of altering the target return.

An allocation of 28 percent to fixed income and 50 percent to equities would allow the board to retain its current long-term return target, Baggesen said.

The Calpers board is scheduled to vote on the allocation in December. Almost all of the fixed-income and stock holdings are managed in-house while more complex assets, such as private equity and real estate, are overseen by outside consultants. Allocations to private equity and real assets would stay at 8 percent and 13 percent, respectively, under all scenarios under consideration.

The allocation revisions occur every four years. Calpers is working to provide for a growing wave of longer-living retirees.

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