CalPERS rethinks investment strategy in the wake of the economic downturn

The Chief Investment Officer of the California Public Employee’s Retirement System, Ben Meng, is repositioning the fund’s investments in the wake of recent underperformance caused by COVID-19. To meet its future obligations, Calpers must generate a 7% annual return. Yet an in-house study in 2019 found that its chances of meeting that target over 10 years are just 39%. To do this, Meng says that the fund has to take greater risk, such as increasing its allocation to buyout funds, adding private credit and, further departing from its past as a conservative holder of stocks and bonds and use leverage to enhance returns.

Additionally, Meng believes that raising the fund’s current 8% target allocation to private equity a little and building a small position in private credit over the next three years could help make up for the losses. At the same time, Calpers is redoubling an effort to cut costs by concentrating its business with fewer outside managers and exiting underperforming strategies. Even if everything works in the plan’s favor, Meng says CalPERS’s chances of hitting its 7% target return over a decade will still be less than 50-50

CalPERS is the largest public pension fund in the US, with 600,000 beneficiaries, and pays out around $22 billion in benefits annually. CalPERS has become a highly important investment entity because of the “CalPERS effect.” It is named after the positive influence CalPERS has on a stock, when it makes it onto it’s “Focus List.” Because of their large size and relevance in the investment community, CalPERS is well renowned. If the money isn’t made up in time, it would work to undermine the plan’s reputation and profitability.

The state would eventually need to make up the difference either by taxes on the public or requiring public employees to contribute more of their salaries. This could lead to a fierce fight about who would shoulder the burden. The public largely are opposed to tax increases, and public workers don’t want to give up more of their paychecks. A standoff seems very possible.

CalPERS’ size and influence makes them an important pillar of the investment community. Most things CalPERS does makes news, from specific investments to big changes in plans like this. Pensions in states across the country are in varying degrees of the same situation because of the COVID pandemic. This could be a potential model either about how to invest effectively or how not to invest to curb the COVID economic downturn.