Because of the global market turmoil, the CalPERS investment staff members told the fund’s Investment Committee at a meeting this week that the system’s current allocations are outside policy ranges for Global Equity, Alternative Investments, and cash.
In materials presented to board members, staff members recommended the asset allocation targets be widened on a temporary basis and that the committee take another look at CalPERS strategic asset allocation adopted in December 2007.
The policy change suggestions included:
- A sharp decline in global equity markets caused the system’s allocation to fall below targets to 56%. Existing policy allowed for a 5% swing above or below the target; the staff recommended a 15% plus or minus change to be allowed.
- Cash was raised by selling equities to meet part of the liquidity needs of the fund, resulting in a cash allocation of 8.6% relative to a 0% target. A cash allocation will be required on a longer term basis to prudently manage the fund’s liquidity needs. Previous policy allowed up to a 2% cash position; the staff recommended permitting up to a 10% cash holding.
- The allocation to alternative investments is above the maximum of the policy range because a drop in the value of the overall fund and “is likely to stay above the current maximum based on projections,” staff members said. With an existing alternative investment target of 10% and a currently allowed +/-3% variance, the staff suggested an allowance for an 8% swing above or below.
“Because of the significant deviation of asset class weights from policy targets the total fund return will have significant tracking error relative to the return of the policy benchmark, and in today’s environment there is limited flexibility to manage the asset allocation relative to existing policy targets and ranges,” the staff recommendation said.
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