CalPERS sees 10% portfolio drop in 2022

CalPERS' portfolio fell 4% in the first quarter and was down 10% as of early June from the end of 2021, in line with the broader market volatility since the beginning of the year due in part to rising inflation, CIO Nicole Musicco told the investment committee on Monday.

The $454.8 billion California Public Employees' Retirement System, Sacramento, earned 2% fiscal year to date as of March 31, she noted. The pension fund earned 7.7% for year, 9.1% for the five years and 8.6% for the 10 years ended March 31. Its fiscal year ends June 30.

Last week alone, the S&P 500 was down 5%, the second worst week since the beginning of the year, Ms. Musicco told the investment committee, which includes the entire board. And while not immune to the market forces, parts of its private markets portfolio has been less vulnerable despite short-term exposure to higher costs, she said.

For example, private equity was the pension plan's highest returning asset class in the fiscal year to date and one-year periods ended March 31, returning 21% and 32.7%, respectively. (CalPERS private equity returns are lagged by one quarter.)

What's more, there has been a higher correlation between equities and bonds, "so diversification has not played out as generally expected," Ms. Musicco said.

"Where do we go from here?" she said. "We have navigated volatile markets like this before" and CalPERS' current asset allocation, which was adopted in November, "is still the right choice."

CalPERS officials will "continue to evolve our strategy," where appropriate, to mitigate risk and take advantage of market dislocation, Ms. Musicco said.

CalPERS is also changing its investments strategic plan to align with an enterprisewide five-year plan the board adopted in April, she said. Included in that five-year plan are integrating sustainable investment strategies as well as mitigating risk of significant investment loss while balancing contribution levels and volatility.

The investment committee also changed its total fund investment policy statement to reflect its new asset allocation, including a new 5% private debt allocation and addition of a total of effective leverage limit of 20% by reducing its active leverage to 15% from 20% and adding 5% strategic leverage to its asset allocation. The new private debt allocation includes suballocation ranges of 20% to 100% for direct lending, 5% to 40% for specialty lending, zero to 25% for liquidity financing, 5% to 40% for real estate financing and zero to 25% for private structured products.

Separately, CalPERS made changes to the glidepath of the target-date funds in its $2.3 billion deferred compensation and $126 million after-tax, deferred tax supplemental contribution plans. Usage of the suite of target-date funds is increasing, accounting for 54% of balances and 75% of contributions, according to a staff report to the investment committee. Sixty-eight percent of plan participants are invested 100% in target-date funds, which are the qualified default investment alternative — the fund selected automatically when a participant joins the program.

The new glidepath allocation increases equity for the 2065 starting portfolio, boosting global equity by 2 percentage points to 94% and cash to 2% from zero. It also reduces by 2 percentage points each real assets to 1% and U.S. fixed income to 3%.