The big risks and potential rewards in CalPERS' new investment strategy
The California Public Employees Retirement System (CalPERS) recently announced that the pension fund will take a new investment approach to increase the odds that it will hit its assumed investment return target and help ensure it has adequate dollars available to pay for retiree benefits.
CalPERS’ new approach—dubbed “More and Better Assets”—is the latest decision by the CalPERS board over the past few years intended to strengthen the resiliency of the pension plan, which is currently just 71 percent funded. The strategy involves a new two-pronged investment approach that combines a push towards higher earnings and riskier assets, with the ability to leverage the fund when there are market opportunities and borrowing costs are low.
“Better assets” refers to CalPERS’ intention to increase the share of its portfolio allocated to private equity and debt assets that the plan hopes will generate higher long-term returns. Given the current low growth environment, CalPERS is betting that private equity is among the few asset classes with a long-term expected return above their currently assumed 7 percent.
“More assets” refers to the CalPERS governing board authorizing administrators to pursue leverage—essentially borrowing money from private banks at preferred rates—of up to 20 percent of their portfolio value (or $80 billion dollars). There appear to be no immediate plans to use this expanded borrowing capacity, nor any guarantee that the system would actually borrow at such levels.
Read more: https://www.ocregister.com/2020/07/28/the-big-risks-and-potential-rewards-in-calpers-new-investment-strategy/
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