A Whole Lot of Nothing

There appeared an article in P&I that reviewed recently implemented asset allocation changes of a massive nature for CalPERS. The largest U.S. public fund ($376.3 billion) shifted more than $150 billion in assets, including investing 15% in new products such as factor-weighted equities. In addition, they added a 3% commitment to high yield and a 1% allocation to a liquidity bucket that could range from 3% to -6% depending on opportunities provided by the market. Yes, leverage may be used if the markets provide unique opportunities.

We’ve discussed these allocation moves before (not specific to CalPERS) as nothing more than shifting deck chairs on the Titanic. The costs associated with shifting $150 billion in assets (commission, market impact, and opportunity cost) must have been massive. Given that they have failed to achieve their primary return objective for 1-, 3-, 5-, and 10-years through fiscal 2019 certainly speaks to needing to do something, but focusing exclusively on the return side of the equation remains the wrong strategy.

This statement attributed to Eric Baggesen, managing investment director for asset allocation, who said that he “expects the system to conduct a mid-cycle asset liability review”, confuses me. I’m not sure what a mid-cycle asset liability review is, but the fact that plans continue to allocate assets without the knowledge of what their liabilities look like or are performing is just silly. You wouldn’t be able to play a sport if you didn’t know how your opponent was performing, but that is precisely what happens in DB pension land every day.

Despite strong market returns for many asset classes in 2019, asset growth is barely exceeding liability growth as U.S. interest rates continue to plummet. Plans that have cash-flow matched their bond exposure to near-term liabilities (Retired lives) have actually insulated themselves from these unprecedented moves in rates by improving liquidity and removing interest rate sensitivity while extending the investing horizon for the alpha (growth) portfolio that is used to beat future liability growth.

Do they really believe that shifting assets among a variety of products and asset classes will stabilize the funded status and contribution expense? Glad to see that they have acknowledged that the plan has liabilities, but not managing to them on a regular basis does little to improve their fate.

2 thoughts on “A Whole Lot of Nothing

  1. Russ, maybe they confused a mid-cycle asset review with a market correction and invested on the wrong side of either! lol

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