How We're Keeping Our Commitment to Retirement Security
By Ben Meng, CalPERS chief investment officer
The COVID-19 crisis has had a profound effect on our communities and on the economy – around the globe, around the nation, and around our state. Like all investors large and small, CalPERS has not escaped the financial turmoil.
I know how troubling the uncertainty in the financial markets is. Many of our members are concerned about the safety of their pension benefits. Will the financial security they worked so hard for be there when they retire?
My job as chief investment officer (CIO) is to safeguard the CalPERS fund for decades to come. Long before the COVID-19 crisis, we began developing a detailed strategic plan that not only is serving us well today but will carry us far into the future.
Because of the times we're in, let me lay out how we're addressing the challenges ahead. I'll explain the steps we took over the last couple of years to prepare for an economic downturn. And I'll showcase our plan to make sure that we will always carry out our mission to pay the retirement benefits California's public employees have earned.
Our Top Priorities
When I returned to CalPERS in 2019 as CIO, I outlined several key goals to strengthen the fund and address a coming downturn. We can't predict the future, so we didn't know when the downturn would come. But we knew it would.
Improve Our Liquidity
We must make sure that we always have the money on hand to pay retirement benefits. That's one of the hard lessons we learned during the financial crisis of 2008, when we faced serious challenges and were forced to sell assets in a depressed market. We now have better liquidity management in place and increased cash coming into the fund so that we are not in that position again.
Improve Our Governance
We're examining our portfolio from the top down. We needed to break down the silos of individual asset classes, take a holistic approach to the total fund, and centralize our governance structure. I liken it to a rowing team: We must all be rowing in the same direction. This means all our investments must complement each other and all contribute to achieving our target investment return target of 7 %. We're constructing a portfolio completely focused on that target while managing risks.
Focus On Our Comparative Advantages
We're a long-term investor. Our size, influence, and long-term investment horizon give us advantages in the market. We are leveraging our brand to implement investment strategies that are scalable to our size, repeatable, and that add value to the fund. These include investment strategies such as a risk-segment approach that emphasizes long-duration treasuries and a factor-weighted public equity portfolio, both of which provide diversification when markets are volatile, as they are now.
Eliminate Costly Fees
I do not want to pay expensive Wall Street fees when we can manage the assets internally better, cheaper, and more efficiently. Last year, we terminated relationships with about 30 external managers, saving about $115 million in fees on an annual, go-forward basis. Our Global Equity Program is now 95% internally managed (up from 80%), while about 78% of our entire fund is managed in-house by our investment professionals.
Recently, some media stories have criticized us for eliminating some explicit tail-risk hedging strategies as part of the reduction in active risk managers. Let me be clear: Explicit tail-risk strategies are valid investment strategies for some investors. However, we chose a different approach that we believe better aligns with our fund and our long-term investing outlook. The path we're on costs less, provides diversification, and scales appropriately to the size of our fund. We're already seeing the results: This approach offset $11 billion of losses during the March sell-off.
Stay Calm and Carry On
There's no need to panic. Market volatility is not unprecedented. Because of the plan we carefully put in place and our ability to access the cash we need, we've been able to take advantage of investment opportunities that this downturn has created. We're executing on our plan, sticking to it, and staying focused.
I believe our fund is in a stronger position today to weather this crisis than it was a year ago. Our commitment to deliver the retirement security our members have earned remains unchanged.