CalPERS investment consultants caution on AI hype and inflation risks after a strong 2025

Tom Tote of Wilshire Advisers opened the committee’s trust‑level review by urging members to prioritize long‑term strategic portfolio thinking rather than react to short‑term geopolitical headlines.

He told the committee that three strategic objectives — leadership in artificial intelligence, rebuilding domestic industrial capacity, and financial stability — will shape markets over time, but that each brings trade‑offs, including inflationary pressure from rebuilding the industrial base and valuation risks from concentrated technology exposures. “You certainly don't want to ignore [geopolitics], but trying to look through the short‑term headlines is a critical thing as we manage portfolios through uncertain times,” Tote said.

Tote reviewed interest‑rate dynamics and their implications for fixed income, saying that recent market pricing reduces the odds of multiple Federal Reserve rate cuts in 2026 and that short‑term Fed cuts may not translate into lower long‑term yields. He warned that if inflation reaccelerates, markets may demand higher long‑term yields, a risk that would reduce the value of fixed‑income holdings and increase government debt service costs.

The presentation also highlighted a widening divergence—often called a “K‑shaped” economy—between households that own significant financial assets and those that do not. Tote noted wages have lagged important household costs such as housing, food and energy, which can constrain consumer spending even while equity markets near their highs. “If the vast majority of folks are on the lower leg of that K versus benefiting from rising prices in assets, they’re likely to retrench and perhaps not spend quite as aggressively,” he said.

On performance, Tote reported that the total fund returned roughly 15.4% for the prior year, with public equity up about 22.5% and private equity up roughly 17.8%; private debt and real assets also contributed positively. He cautioned these are realized past returns and that forward‑looking expected returns remain subdued because of current valuations.

Committee members pressed on specific risks from AI and the policy responses needed to manage workforce transition; staff and consultant responses repeatedly emphasized diversification, scenario planning and improved liquidity positioning to allow the fund to be defensive and opportunistic when dislocations occur. Tote and staff said liquidity planning has been strengthened to give the fund flexibility to avoid forced sales and to redeploy capital opportunistically in market stress.

The committee did not take a policy vote on asset allocations in this session; the presentation was an information item designed to inform future allocation and strategy work.