CalPERS CEO Marcie Frost sent the following letter to U.S. Representative James Banks:

February 20, 2020

The Honorable James E. Banks
U.S. House of Representatives
1713 Longworth House Office Building
Washington, D.C. 20515

Dear Congressman Banks:

Thank you for the opportunity yesterday to have members of my team meet with your staff to discuss your letter to Governor Gavin Newsom, dated February 12, 2020, regarding the California Public Employees' Retirement System's ("CalPERS") investments in the stocks of Chinese companies. I would like to recap the four key points discussed: (1) CalPERS does not select individual companies in which to invest, (2) California's Governor does not hire CalPERS' Chief Investment Officer ("CIO"), (3) the Office of Foreign Asset Control ("OFAC") is responsible for restricting which equities investors may trade, and (4) CalPERS has a duty to seek returns in the market sufficient to meet the pension obligations to its beneficiaries, not to promote a policy agenda of any persuasion through its investment strategy.

To correct the record, we again explain our global investment approach below. Specifically, we address the CalPERS Board of Administration's role in selecting the investment strategy, and the use of global indices for passive investing in international equities.

As the largest public defined benefit pension fund in the United States, we manage approximately $400 billion in global assets on behalf of 2 million public employees, retirees, and beneficiaries. We take our duty to pay benefits decades into the future very seriously, as well as adherence to federal law, and our portfolio selection process reflects our commitment to these duties.

The CalPERS Board of Administration sets the investment strategy

The CalPERS Board of Administration ("Board") consists of 13 members who are elected, appointed, or hold office ex officio. The Board approves investment policies, including the Global Equity investment policy, which sets forth passive investment management in international equities through the use of indices. CalPERS' Global Equity investment policy sets out our investment objectives, calling for investments in companies internationally to "provide exposure to economic growth."

CalPERS has been investing in international equities for decades

The growth and development of emerging markets and the expansion of global growth generally over the last few decades have been an important development for pension funds. Like many public pension funds across America, CalPERS provides its beneficiaries with a defined benefit. CalPERS' global investment portfolio is necessary to meet its 7% investment return target to pay retirement benefits for its members. Accordingly, CalPERS holds $200 billion in stocks from companies based in nearly 50 countries, including the United States. Approximately 1% of our total fund is invested in Chinese companies and passively managed through our indexed public equity portfolio.

Global investments are made by using a leading index in compliance with federal law

CalPERS invests in international stocks using two well-established indices: the MSCI and the FTSE. Indices are created to track publicly traded stocks, bonds, and consumer prices for common goods and services. By design, indices track the performance of a selected basket of stocks that are selected by the index creator based on preset criteria. By using an index-based investment strategy, CalPERS makes passive investments. Passive investing is a "buy-and-hold" strategy, meaning CalPERS will purchase and maintain ownership of stocks over a multi-year time horizon to provide long-term value. CalPERS uses the MSCI and FTSE indices because they are commonly used for investments outside of the United States.

In 2019, the FTSE and MSCI modified their respective indices to include China A-Shares, thereby increasing their exposure to Chinese equities. CalPERS rebalanced its portfolio in light of these changes accordingly, resulting in the removal of 143 stocks and the addition of 198 stocks. Nearly half of the companies added were Chinese companies because the MSCI and FTSE indices changed to include China A-Shares. Rebalancing involves periodically buying or selling assets in a portfolio to mimic the indices. As discussed, the index providers, not CalPERS or its CIO, decide which equities are included in the indices.

Importantly, index providers must develop indices that only include companies that the U.S. Government has determined are permissible for investment. OFAC is responsible for restricting which equities investors may trade in, blocking investments in certain stocks to protect national security. CalPERS takes these restrictions very seriously, thereby operating in full compliance with OFAC's rules. Accordingly, and critically, CalPERS does not have any holdings in any company that OFAC has blocked from investment.

Pension funds across the United States invest through indices

As mentioned above, CalPERS uses the MSCI and FTSE indices as do many public pension funds across America, including the Indiana Public Retirement System in your home state. According to a report released by Aon in October 2019, the MSCI and FTSE indices "remain the most popular indexes for U.S. based institutional investors investing in overseas equity markets. Including an international equity option with a material allocation to emerging markets equities is considered best practice in the marketplace, exemplified by adoption among public plans, defined contribution plans, and target date funds."

It is regrettable that your office did not contact CalPERS to check the facts before publishing baseless accusations. We are always happy to provide factual information related to all aspects of CalPERS' business.


Marcie Frost
Chief Executive Officer