CalPERS mulls increasing alternatives allocation

The $182bn Sacramento, California-based pension, struggling with the denominator effect, will vote next week on whether to raise the upper limit of its target allocation to real estate and private equity. The pension's real estate portfolio is currently 1.6% overweighted.

The $182 billion California Public Employees’ Retirement System is considering temporarily increasing its target allocation range to real estate and private equity in an attempt to combat an increasingly overweighted alternatives portfolio.

In documents released today ahead of next week’s investment committee meeting, CalPERS staff recommended that the pension increase the upper limit of its target allocation to real estate from 13 percent to 15 percent.

As of 31 October, CalPERS' actual allocation to real estate was 11.6 percent – well above its policy target of 10 percent.

CalPERS staff also recommended increasing the target allocation to its alternative investment managers, including private equity and hedge funds, from 13 percent to 18 percent. The actual allocation as of the end of October was 13.8 percent, compared to a policy target of 9.5 percent.

The changes would only be valid until a comprehensive asset allocation review is conducted in the first half of 2009, according to investment committee documents.

The new measures, which also include an expansion of the target policy range for global equities from 5 percent to 15 percent, are intended to remedy the so-called denominator effect, whereby an institutional investor’s sinking assets under management, caused in this case by CalPERS plunging public equities programme, causes its actual allocation to illiquid asset classes such as private equity and real estate to become overweighted.

CalPERS investment advisors Wilshire Consulting and Pension Consulting Alliance have both endorsed the new measures after reviewing alternative strategies. In a letter to CalPERS investment committee members, Wilshire said “no other option, including buying stock options to hedge further market declines, selling fixed income at current prices, or reinvesting the pension’s cash reserves in equity futures, appeared to be a better use of CalPERS capital.”

The denominator effect, which has roiled the private equity fundraising market, has caused other major limited partners to adopt similar measures. Just last month, the California State Teachers’ Retirement System (CalSTRS) voted to temporarily increase the upper limits of its target allocations to private equity and real estate.

Other investors who have adopted similar measures include the Montana State Board of Investment and the Florida State Board of Administration.