Calif. Pension Fund Shifts Away From Stocks, Bonds

By Michael Liedtke
Associated Press
Sunday, December 23, 2007

SAN FRANCISCO -- The California Public Employees' Retirement System will sell more than $20 billion in stocks and bonds as the largest U.S. public pension fund aims for higher returns from venture capital, commodities, real estate and several other investment options.

Under a new strategy approved last week, Calpers rolled back its exposure to the stock market to the lowest level in 14 years. The revised investment target calls for 56 percent of Calpers's roughly $261 billion portfolio to be held in stocks, down from 60 percent.

The reshuffling will trim Calpers's bond holdings even more. The threshold for these fixed-income investments will drop from 26 percent to 19 percent of the portfolio.

The shake-up won't be as jarring as it could have been because the Calpers's stock holdings have already been shaved to slightly less than 58 percent of the investment portfolio.

About $4.7 billion in stocks will have to be sold to hit the 56 percent target, based on the Oct. 31 value of Calpers's investment portfolio. The new investment mix will require selling about $18 billion in bonds.

The changes will be made during the next two to three years.

Calpers plans to shift the money into other investments expected to help the pension fund eke out better returns.

The fund is coming off its best showing in nearly a decade, with a total return of 19.1 percent in its last fiscal year, ended in June. But Calpers can't afford to rest on its past performance, with pensions and other retirement benefits owed to about 1.5 million current and former government employees.

Calpers is betting it will be better off entrusting more money to venture capitalists and leveraged buyout specialists, who historically have produced higher returns than the overall stock market.

The pension fund also will increase its real estate holdings and pour more money into commodities, timberlands, inflation-adjusted bonds and projects devoted to building roads, bridges and other infrastructure.

The plan calls for Calpers to earmark 10 percent of its portfolio for "alternative investments," up from 6 percent. This category includes venture capital and other private equity. Calpers will need to commit an additional $6.5 billion to reach the benchmark for alternative investments.

Calpers is expanding into new turf with "inflation-linked" investments -- a niche that includes timberlands, commodities and infrastructure. The pension fund is devoting about $13 billion, or 5 percent of its portfolio, to this category.

About 10 percent of Calpers's portfolio will consist of real estate investments, up from 8 percent. Hitting the target will require additional real estate investments of about $4 billion.

The investment overhaul will require Calpers to dump U.S. stocks and buy stakes in more companies in Europe, Asia and elsewhere. The new mandate reflects a widening belief that many of the best investment opportunities will emerge outside the United States during the next decade.

Calpers wants its stock portfolio to be evenly divided between U.S. and international companies, with 28 percent of its holdings in each class. The current breakdown stands at roughly 36 percent for U.S. stocks and 21.6 percent for international stocks.

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