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CalPERS’ need for speed

Discretionary investments, which facilitate faster decisions, work best when management has significant investing experience, one pension consultant said.

The US’s largest public pension plan has increased its top executives’ ability to invest without committee approval, making it a more agile investor.

Last week, the California Public Employees’ Retirement System (CalPERS) raised the threshold for its managing investment director and chief investment officer to invest in real estate without committee approval to $3 billion and $6 billion per commitment, respectively. Previously, the managing investment director could make up to $1.5 billion in investments and the chief investment officer could make up to $2.5 billion, according to a CalPERS’ spokesman.

The moves are described in meeting documents as part of a broader effort to reduce complexity and improve transparency in the pension’s investment strategy. The change is intended to increase consistency across CalPERS’ real assets program, which also includes infrastructure and forestland investments.

Managers are still required to mitigate risk by maintaining “an appropriate level of diversification,” and the fund has outlined geographical and leverage limits for each sector, constraints that “are intended to create a lower risk portfolio,” according to pension documents.

Alan Kosan, the head of consultancy Segal Rosercasey’s alternative investments research group, told PERE that the change helps with execution speed, which also makes the pension system a more attractive partner. However, he cautioned that significant discretionary investments can only succeed when the executives charged with investing without traditional oversight have deep investment expertise in that particular asset class.

In CalPERS’ case, its real assets managing director Paul Mouchakkaa was previously a managing director in Morgan Stanley Real Estate Investing (MSREI), while the pension’s CIO Ted Eliopoulos was the senior investment officer for CalPERS’ real estate division from 2007 to 2011 before heading all real assets. Like Mouchakkaa, Eliopoulos also worked in the private sector, including as an associate attorney in the real estate department of Latham & Watkins.

In addition to the individual increases, CalPERS also capped annual discretionary real estate investments at $10 billion each, up from $7 billion. For a pension plan managing $306.8 billion, including $27.3 billion in real estate according to its website, the new limit looks appropriate.

“On an absolute basis, that seems meaningful enough to move the needle if they’re successful and not disastrous to the plan’s integrity if they screw it up,” Kosan said.

CalPERS’ real estate underperformed its benchmark in the fiscal year ended June 30, with sales of legacy real estate assets dragging down performance, according to its annual performance review. The pension system saw real estate generate a net return of 7.1 percent for the previous fiscal year, 5.6 percent below its real estate benchmark, the NCREIF-ODCE index. The asset class returned 13.5 percent over the same time period in 2014 to 2015, beating its benchmark by 1.1 percent.

Overall, CalPERS saw a 0.6 percent net return on investments, which executives pinned on global market volatility. The pension system reported a 2.4 percent total net return for the previous fiscal year.