UNITED STATES - The California Public Employees' Retirement System (CalPERS) has placed real estate, infrastructure and forestry in a ‘real' assets bucket as part of an overhaul of its asset allocation strategy.
The three asset classes will be grouped together on the grounds that they all provide long-term income and are less sensitive to inflation risk.
CalPERS has set its target allocation to real assets to 13%, although it has introduced a new range whereby exposure can be as much as 5% higher or lower than this at any point in time.
The changes are part of the pension fund's decision to manage its $220bn (€166bn) multi-asset portfolio by focusing on key drivers of risk and return, including economic growth, inflation, liquidity and interest rates.
"We learned in the financial crisis and the past recession that a liquidity crunch or inflation can have a significant impact on portfolio performance in ways that many investors didn't anticipate," said Rob Feckner, CalPERS board president.
"We focused on assets and returns, but not enough on the risk of our allocations. We're majoring now on careful study, reaching out to the best-informed professionals of the financial world and taking all viewpoints into account."
CalPERS's traditional asset allocation structure has been replaced by five major groups: ‘liquidity', including cash and government bonds; ‘growth', including equities and private equity; ‘income', including Treasuries and other fixed income securities; inflation, including commodities and inflation-linked bonds; ‘real'.
There is no timeline for deploying funds under the new allocations since investments will depend partly on market trends and opportunities.
CalPERS investment staff will use new risk management tools as they review the asset allocation mix and shift funds to take advantage of opportunities, depending on market conditions, keeping close tabs on risks and allocations.
"While the allocations won't change much, we're going to be looking at these assets differently than we did before," said George Diehr, chair of the CalPERS investment committee.
"We now have a better way to look at risk and account for what's happening in the markets and to re-categorize our assets according to what drives them.
"We'll be able to better anticipate overall performance and its potential impact on employer contribution rates and our retirement system's funded status."
Meanwhile, CalPERS has also suspended its mortgage loan programme for members, citing limited member usage but also a reduction in risk.
Since the Member Home Loan Program (MHLP) launched 29 years ago, CalPERS members have taken out more than 136,000 loans worth more than $22.7bn.
The program took a conservative approach to lending from the start, offering mostly fixed 15-year and 30-year mortgages at market rates.
But the Member Home Loan Program has still been affected by the changing mortgage marketplace and severe financial downturn. Since 2004, the programme has been averaging between 1,000 and 4,500 loans per year, just a small percentage of CalPERS 1.6 million members and retirees.
Despite the low numbers, the amount of staff time required to operate the complex loan program has risen considerably and MHLP has suffered from an increasing number of delinquencies and defaults.
"Over the past few years, there has been limited interest among our members in MHLP," said Diehr. "This change allows us to redirect our resources and reduce the risk to the fund."