CalPERS International Stock Investments & China
We've Been Investing in China for Decades
We began investing in international stocks in the 1980s. We're a global investor, investing in assets across the world, including the U.S. Our international stock investments are important for the pension fund to achieve its investment return target to pay retirement benefits for our members for the long term.
How Do We Invest in International Stocks?
We invest in international stocks using an index. In the financial world, indices are created to track publicly traded stocks, bonds, and consumer prices for common goods and services. For example, an index that is often referenced in the news is the Standard & Poor's (S&P) 500, an index that tracks the performance of stocks of 500 of the largest companies in the U.S. Indices can also be used to define the universe of stocks an investor can purchase and hold in their portfolio. “Passive investing” is when an investor buys and holds individual company stocks in the same proportions they are in the index.
We invest passively for our international stock portfolio, using indices provided by Morgan Stanley Capital International (MSCI) and Financial Times Stock Exchange (FTSE).
How Is an Index Created?
Indices are created by companies that are often referred to as “index providers.” Indices are constructed using a set of rules and methodologies. Index providers develop indices of securities in which U.S. persons are legally permitted to invest.
What Happens When an Index Is Changed By an Index Provider?
Global equity markets are always changing. Companies that meet (or cease to meet) the criteria established by index providers change over time, leading to companies being added or deleted from the index. When an index is updated, we rebalance our portfolio accordingly based on our current investment policies and asset allocations. Rebalancing involves periodically buying or selling assets in a portfolio to mimic the index.
For example, in 2019 FTSE made a change to include shares of mainland China-based companies that were previously not available to foreign investors (China A shares). By including China A shares in the indices, FTSE increased exposure to China in the index. MSCI also made changes to include China A shares. In the fall of 2019, we rebalanced our portfolio to remove 143 stocks and add 198 stocks. Nearly half of the companies added were Chinese companies given the changes made by the index providers to include China A shares. The changes made to align with the indices are consistent with our passive investment approach.
In 2020 and 2021, the U.S. Office of Foreign Assets Control (OFAC), a division of the Treasury Department, directed all U.S. persons (including CalPERS) to cease further purchases of and divest from certain securities identified by the U.S. government as financing communist Chinese military companies. Such securities were subsequently removed from indices used by U.S. clients and we sold the affected securities. We continue to closely review and fully comply with OFAC actions that affect its international stock portfolio.
What Oversight Is in Place for Our International Stock Investments?
The CalPERS Board of Administration (Board) is responsible for the stewardship of our investment portfolios. The Board sets the target asset allocation for our pension funds and weighs in on the indices that we’ll use to guide portfolio construction and assess performance. The Board also sets investment policies that specify how our portfolios are managed and monitored.