CalPERS CIO: Portfolio ‘deviating away’ from targets under market chaos

The pension's portfolio has lost billions in value as the public markets have struggled due to the covid-19 pandemic.

California Public Employees’ Retirement System chief investment officer Ben Meng warned the pension’s board Wednesday that the rough stretch in public markets due to the coronavirus pandemic is affecting other parts of its portfolio.

“Because of the fluctuations in the market over the past few weeks, our portfolio rates are deviating away from our strategic asset allocation targets,” Meng said at the meeting, which was conducted via teleconference. “If market volatility remains aggravated, we may slip to the outer range of these targets.”

Meng did not tell the board which asset classes were experiencing this issue. He did say staff would take action.

“We are monitoring the situation very closely, and have a plan in place to address it, and we’ll keep you informed,” he said.

CalPERS declined to elaborate on the asset classes to which Meng was referring.

During economic downturns, institutional investors’ private equity portfolios are vulnerable to the “denominator effect.” This occurs when the sudden drop in public equity value can cause illiquid portfolios to take up a larger piece of the overall portfolio than allowed by policy.

Despite deploying its highest level of private equity capital in a decade last year, CalPERS’ private equity portfolio was underweight before the drop in public equities. As of December 31, it was valued at $26.1 billion, making up 6.6 percent of the total portfolio. That was below its target of 8 percent.

The covid-19 outbreak and near shutdown of all activity in the US has led CalPERS to implement a variety of social distancing measures, including the closure of eight of its regional offices and the cancellation of all in-person appointments until the end of March. Meanwhile, its headquarters in Sacramento remain open for now.

The office was closed on Monday after one of its employees showed symptoms of coronavirus, but the test results were negative, CalPERS’ CEO Marcie Frost told the board during the call.

Talking about the deepening economic crisis, Meng said he does expect CalPERS to experience volatility in the short term but added: “We invest for years and decades. Of course, we have been paying attention to how financial markets have been responding to coronavirus. We are a long-term investor and we focus on achieving the best risk-adjusted returns on the portfolio for many years.”

This story first appeared in affiliate publication Buyouts. The author Justin Mitchell can be reached at Arshiya Khullar, a senior Asia reporter for affiliate publication PERE, contributed to this report.