Board hears Howard Marks, takes interactive risk-appetite survey as staff frames 'total portfolio' approach

CalPERS board members spent a large portion of the meeting in an educational session on portfolio construction and risk appetite led by Chief Investment Officer Stephen Gilmore and featuring guest speaker Howard Marks of Oaktree Capital Management.

Marks opened by reframing risk as the raw material of investing rather than an evil to avoid, stressing that investors are paid to take appropriate uncertainty and that volatility alone is not a useful measure of risk. He urged the board to focus on “asymmetry” in outcomes — protecting on the downside while capturing upside — and to consider risk in probabilistic terms.

Gilmore briefed the board on staff work toward a “total portfolio approach” (TPA). Under the TPA, the board would set an explicit, fund-level risk appetite and a reference portfolio consistent with that appetite; staff would then have delegated discretion to allocate active risk across the whole fund rather than by static, stand‑alone asset-class targets. Gilmore said TPA can surface the common drivers (for example equity beta and growth exposure) that underlie multiple asset classes and make it easier to compare investments across those classes.

After the presentations, board members answered an 11-question interactive survey designed by staff to reveal the board’s risk preferences and priorities. Gilmore and staff ran the live poll; aggregated responses showed a broad distribution of views rather than a single consensus. On some questions (for example, whether to concentrate where CalPERS has advantages), responses clustered; on others (for example, tolerance for multi-year drawdowns or preference for liquidity), answers varied widely. Gilmore described the exercise as input for staff to design portfolios and a workshop in February that would further refine the board’s risk parameters.

Board members raised implementation questions about governance, oversight, incentives and staffing. Multiple members urged explicit connections between the risk appetite the board adopts and staff accountability, including incentives for taking the active risk the board wants. Several directors stressed the importance of transparent reporting and revisiting the survey once members have had time to reflect.

Gilmore said staff will use the board’s responses to draft potential reference portfolios and policy options for later discussion and that additional education and workshops will follow. Howard Marks said he would participate in the February session and in follow-ups; he reiterated that investors must balance the risk of losing money with the risk of “missing out” if too little risk is taken.