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CalPERS approves new real assets strategic plan

Tuesday, April 19, 2016
Opalesque Industry Update - The California Public Employees' Retirement System's (CalPERS) has approved a new five-year strategic plan for its Real Assets asset class. The new plan for the asset class, which includes the Real Estate, Infrastructure, and Forestland programs, largely continues the investment goals and parameters of the programs' previous strategic plans, but better harmonizes nomenclature and aims to further reduce risks, costs, and complexity.

"This strategic plan builds on the tremendous work done to rebuild the program after the mortgage meltdown and financial crisis," said Henry Jones, CalPERS Board Vice President and Investment Committee Chair. "Real Assets is a vital part of the CalPERS portfolio and this plan will keep it on the right track for the next five years."

The Real Assets asset class serves to provide stable and predictable cash yields, diversify equity risk in the portfolio, and protect against inflation. The asset class will continue to focus on investing in high quality core assets primarily in U.S. markets through separate accounts.

The new strategic plan establishes clear parameters across the asset class, where previously they resided at the individual program level. It also uses consistent terminology to make elements of the individual programs easier to understand and report. The parameters for the asset class are as follows:

Risk

  • Core: 75-100 percent
  • Value Add: 0-25 percent
  • Opportunistic: 0-25 percent
  • Development (Build-to-Core): 0-10 percent

Geography
  • U.S.: 70-100 percent
  • International Developed: 0-30 percent
  • International Emerging Markets: 0-15 percent
  • International Frontier Markets: 0-5 percent

Leverage

  • Loan To Value Ratio: 55 percent
  • Debt Service Coverage Ratio: 1.40

Manager Limit Target
  • 25 external managers

Segments
  • Essential
  • Commercial
  • Consumer
  • Residential
  • Specialized
  • International

Significant additions include a hard cap on development opportunities, increased leverage monitoring measure, and a pilot Real Estate program that would create unlevered mandates, allowing external managers to focus only on unlevered performance. Details of this pilot and a timeline for implementation have yet to be determined. The new strategic plan also generally outlines the ESG Integration goals for the next five years, including manager expectations, risk assessment, and research.

"The unifying elements of this strategic plan will make the asset class less complex to manage, and make reporting more transparent," said Paul Mouchakkaa, Managing Investment Director for Real Assets. "We look forward to the next five years and the continued growth of the portfolio."

The adoption of the new strategic plan completes a nearly year-long process that examined all aspects of the asset class and included input from the CalPERS Board, Investment Office staff, external consultants, strategic partners, and industry leaders.

Items for future review such as Real Assets benchmarks, the role of the Forestland program, and Real Assets allocation will be examined in 2017 as part of the next Asset Liability Management process.

For more than eight decades, CalPERS has built retirement and health security for state, school, and public agency members who invest their lifework in public service. Our pension fund serves more than 1.7 million members in the CalPERS retirement system and administers benefits for more than 1.4 million members and their families in our health program, making us the largest defined-benefit public pension in the U.S. CalPERS' total fund market value currently stands at approximately $293 billion.

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