MBA of Banking & finance

FUND MANAGEMENT & TREASORY OPERATION

Title

Submission Date :
Lecturer

Assignment
WEEK 4
Dr. Khairul Anuar

Student name:

Anas ALhajjar

Student ID:

110037722

Semester

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Instructions:

Review and summarise CalPERs investment policies.

You review should cover the following areas.
(a) CalPERS Investment Beliefs & Policy Statement;
(b) asset allocation;
(c) investment classes;
(d) ethics
(e) investment and risk management.

(a) CalPERS Investment Beliefs & Policy Statement :

It is important to understand that the role of pension funds should not be to create
the market in which they invest. Pension funds, given their fiduciary duty, are
inherently conventional in their investment policies and do not take the kind of risks
required of early market makers. Pension funds provide liquidity in markets and exit
opportunities for individuals and organizations that engage in early risk-taking. To be
successful, investing in targeted private equity must be a profitable endeavor.

The

most important best practice drawn from this case study is that success in pension
fund investment in urban revitalization is measured in terms of the risk-adjusted rate
of return rather than social impacts obtained. To paraphrase Lowenstein (1996), we
manage what we measure. Such focus allows the fund managers to meet their
fiduciary responsibilities without distraction. This is also the best way to benefit the
community, since theory suggests that, by filling capital gaps, the investor should both
receive excess returns and support economic development. If the investor does not
receive an appropriate return, it may be that they are not filling a true capital gap (i.e.
a gap that an efficient market would have funded), but are instead investing in
projects that an efficient market would have left unfunded. Calabrese (2001) lists the
comparability of fund returns to an appropriate benchmark as one of the common
characteristics of leading successful alternative investment programs. CalPERS does
not make concessions on risk/return criteria.CalPERS is the largest public pension fund
in the United States with approximately $275 billion in global assets and equity
holdings in over 9,000 companies. CalPERS provides retirement benefits to more than
1.6 million public workers, retirees, their families and beneficiaries and we rely on the
quality and integrity of market information to allocate capital on behalf of our
beneficiaries. Recently, CalPERS developed a set of Investment Beliefs that are
designed to provide a basis for strategic management of the investment portfolio.
Included in CalPERS Investment Beliefs is the view that Long-term value creation
requires effective management of three forms of capital: financial, physical and
human. CalPERS believes that strong governance, along with effective management

of environmental and human capital factors, increases the likelihood that companies
will perform over the long-term and manage risk effectively.
A long time investment horizon is a responsibility and an advantage Long time
horizon requires that CalPERS:
Consider the impact of its actions on future generations of members and taxpayers.
Encourage investee companies and external managers to consider the long-term
impact of their actions.
Favor investment strategies that create long-term, sustainable value and recognize
the critical importance of a strong and durable economy in the attainment of funding
objectives.
Advocate for public policies that promote fair, orderly and effectively regulated
capital Markets.
Long time horizon enables CalPERS to:
Invest in illiquid assets, provided an appropriate premium is earned for illiquidity
risk.
Invest in opportunistic strategies, providing liquidity when the market is short of it.
Take advantage of factors that materialize slowly such as demographic trends.
Tolerate some volatility in asset values and returns, as long as sufficient liquidity is
Available.
Sub-beliefs:
Governance is the primary tool to align interests between CalPERS and managers of
its capital, including investee companies and external managers.
Strong governance, along with effective management of environmental and human

capital factors, increases the likelihood that companies will perform over the longterm.
and manage risk effectively

CalPERS

may

engage

investee

companies

and

external

managers

on

their

governance and sustainability issues, including:

Governance practices, including but not limited to alignment of interests.
Risk management practices.
Human capital practices, including but not limited to fair labor practices, health and
safety, responsible contracting and diversity.
Environmental practices, including but not limited to climate change and natural
resource availability.
CalPERS strategic asset allocation process transforms the funds targeted rate of
return to the market exposures that staff will manage.
CalPERS will aim to diversify its overall portfolio across distinct risk factors / return
drivers.
CalPERS will seek to add value with disciplined, dynamic asset allocation processes,
such as mean reversion. The processes must reflect CalPERS characteristics, such as
time horizon and size of assets
CalPERS will consider investment strategies if they have the potential to have a
material impact on portfolio risk and return
CalPERS will balance risk, return and cost when choosing and evaluating investment
managers and investment strategies
Transparency of the total cost to manage the CalPERS portfolio is required of
CalPERS business partners and itself
Performance fee arrangements and incentive compensation plans should align the
interests of the fund, staff and external managers

 CalPERS will seek to capture a larger share of economic returns by using our size to
maximize our negotiating leverage. We will also seek to reduce cost, risk and
complexity related to manager selection and oversight
When deciding how to implement an investment strategy, CalPERS will implement
in the most cost effective manner

(b) asset allocation :

Many institutional and individual investors have an asset allocation policy that calls
for investing a specified percentage of the total value of a portfolio in each of several
asset classes. To conform with such a policy as market values change requires selling
assets that performed relatively well and buying those that performed relatively
poorly. Such a strategy is clearly contrarian and can only be followed by a minority of
investors. In practice, many investors seldom rebalance completely to conform with
their policy. On the other hand, many multi-asset mutual funds, increasingly used in
defined contribution plans, do so frequently, resulting in contrarian behavior. This
paper presents an alternative approach, in which an asset allocation policy adapts as
markets move, taking into account changes in the outstanding market values of major
asset classes. Such policies can take important information into account, reduce or
avoid contrarian behavior and could be followed by a majority of investors.CalPERS
ASSET ALLOCATION STRATEGY : CalPERS diversification strategy is for an ongoing goal
to maintain targets and ranges within their asset allocation mix. To ensure prevention
of large losses and to preserve capital.Traditional asset allocation uses a fixed ratio to
distribute

assets

among

different

investment

categories.

The

ratio

is

typically

determined based on parameters such as an investors age, financial objectives or risk

tolerance.Asset Allocation The starting point and most important element of CalPERS
successful return on investment is our asset allocation - our diversification among
stocks, bonds, cash and other investments.Asset allocation is not an asset-only or
liability-only decision. All factors, including liabilities, benefit payments, operating
expenses, and employer and member contributions are taken into account in

determining the appropriate asset allocation mix. Our goal is to maximize returns at a
prudent level of risk - an ever-changing balancing act between market volatility and
long-term goals.CalPERS follows a strategic asset allocation policy that identifies the
percentage of funds to be invested in each asset class. Policy targets are typically
implemented over a period of several years on market declines and through dollar
cost averaging.
(c) investment classes :
As the nation's largest public pension fund with assets totaling $277.2 billion as
of October 31, 2013, CalPERS investments span domestic and international
markets.The CalPERS Board of Administration has investment authority and
sole fiduciary responsibility for the management of CalPERS assets. With the
Board's guidance, the CalPERS Investment Committee and Investment Office
carry out the daily activities of the investment program.CalPERS has generated
strong long-term returns by effectively managing investments to achieve the
highest possible return at an acceptable level of risk. The CalPERS portfolio is
diversified into several asset classes, so any weaknesses in one area are
offset by gains in another. The Board follows a strategic asset allocation policy
that targets the percentage of funds invested in each asset class.

(d) ethics :

CalPERS Toughens Ethics, Accountability a Track Record of Reforms and Acti

ons CalPERS has taken aggressive steps to implement policies and reforms t
hat strengthen the pension funds accountability and ethics, and to ensure full
transparency.These actions have included:
Strong disclosure policies and rigorous regulation of placement agents.
Tough rules for communication between Board Members and staff about inves
tment proposals .
Authority to discipline Board members who violate policy .
The pursuit of information and a special review to ensure CalPERS has not be
en victimized by placements agents .
A ban on gifts to employees from business partners and potential business
partners The actions are aimed at providing CalPERS members, employers
and

the

public

complete

confidence

in

the

Systems

investment

decision

making process and ensure the CalPERS Board is meeting its fiduciary duty.

(e) investment and risk management

CalPERS Risk Management System
CalPERS uses the Risk Management System to provide a comprehensive
framework for measuring, monitoring and managing risk. This system is based
on a quantitative model designed to produce a forward looking view of market
volatility for the CalPERS Total Fund. The Risk Management System has been
in place for a number of years and is currently being reviewed to determine
which components should be updated.The Risk Management team began work
in early 2009 to enhance and enlarge the concept of risk to include additional
measures such as counterparty risk, concentration risk, leverage and liquidity.

These measures are intended to supplement the existing volatility measures

and to provide a more complete assessment of risk. The sources of risk to
CalPERS are constantly changing and managing those risks requires a more
flexible approach to effectively identify, measure and communicate investment
risk.The Risk Management team uses these risk measures in combination to
achieve a Total Fund view of the investment and risk profile at CalPERS, to
increase return on risk taken, and establish risk as a key consideration in the
investment decision-making process. These risk measures are intended to help
us answer the question how are we doing? They provide CalPERS with a
methodology

to

incorporate

risk

management

integrate
targeting

process.The

expected
and

returns

with

measurement

Investment

Committee

risk
into

management
the

receives

daily

and

to

portfolio

quarterly

risk

updates based on these risk measures. The Committee also receives analysis
of the risk impact to CalPERS Total Fund of new investment strategies. Risk
management

at

CalPERS

will

continue

to

be

component in the investment decision-making process.

an

integral

and

evolving