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CalPERS staff proposes reference‑portfolio design and active‑risk framework to guide total‑portfolio approach
Summary
CalPERS investment staff outlined a proposed reference portfolio and a single active‑risk metric to capture public and private deviations from that benchmark. The proposal narrows reference‑portfolio options, seeks trustee involvement in setting active‑risk limits, and emphasizes regular reporting and liquidity guardrails.
CalPERS investment staff presented an education and design briefing on a proposed reference portfolio and an integrated active‑risk framework intended to support a total‑portfolio approach.
Staff described the reference portfolio as a simple, investable benchmark that expresses the board’s risk appetite and provides a baseline for measuring manager and strategy performance. The recommended construction emphasizes a market‑cap weighted global equity index for equities and a diversified U.S. Treasury spectrum for the safe‑asset component. Staff said that design details will return to the board in the coming months, with a first reading scheduled for September and a final decision in November.
A key innovation staff proposed is a single “active risk” metric that consolidates public‑market actionable tracking error with the currently unaggregated active exposures from private markets (private equity, private debt, real estate, infrastructure). Michael Krim and others showed that the portfolio’s current monitoring focuses on narrow public‑market tracking error (about 15 basis points actionable), while an aggregated active‑risk view estimated the total portfolio’s deviation from a reference portfolio at roughly 230 basis points. Staff asked trustees to set an overall active‑risk limit in November and said management would operate inside delegations already granted by the board.
Trustees asked how the new metric interacts with existing ALM processes and what would trigger a board review if active risk does not generate the expected premium. Staff and the board’s advisers said the ALM cycle (full review every four years with two‑year check‑ins) will remain; the new framework provides higher‑frequency transparency so trustees can monitor whether active risk is being deployed effectively and whether the reference portfolio still reflects the board’s risk appetite. Scott (consultant) noted the board retains options — reduce the discount rate, change the reference portfolio, or change active‑risk limits — if forward expectations are not met.
Staff also presented return expectations ranges from multiple providers and noted that equilibrium (very long‑run) assumptions tend to be higher than 20‑year forward estimates because of current valuation levels. Staff recommended trustees view ranges rather than single point estimates.
On liquidity, staff described a conceptual “comfort zone” inside an absolute “no miss” line for obligations. That guardrail, combined with improved reporting, would be used to manage private‑market expansion and ensure benefit payments are protected.
Ending: Trustees supported the goals of clearer, consolidated reporting and said they would review educational materials and the narrower set of proposed reference portfolios at future meetings before a formal vote in November.
