The California Public Employees' Retirement System (CalPERS) is to conclude its research into a new asset allocation method based on risk exposure.
In a series of workshops held today and tomorrow, the investment staff will look at the possibility of using alternative asset classification (AAC) before reporting to the investment committee.
Under the new classification, which the fund has been investigating since March, assets would be grouped together in "buckets" of different risk exposures, including growth, income, real assets, liquidity/hedge and inflation.
"Staff believes that this classification combines assets according to the similarity of roles as described above and allows the committee to set strategic targets to better manage against key macro risks," said senior investment officer, asset allocation/risk management Farouki Majeed in a memo to staff.
"Staff will discuss the pros and cons of the current and this AAC at the alternative liability management (ALM) workshop and propose a selection by the committee."
Majeed also quoted a research note written by Wilshire Associates on the use of AAC.
In the note, entitled The Bucket List, Wilshire said: "The concept of grouping investments into buckets is an acknowledgement that, while an increased number of asset classes helps improve diversification, some investment categories behave similarly to others within various economic environments.
"By aggregating related investments into a broad macro-asset class bucket, the portfolio is able to benefit from a broad and diversified approach within each bucket, while focusing more attention on higher order trade-offs; namely the relative weighting across buckets. The effective combination of macro-asset class buckets can lead to more dependable diversification and risk reduction properties."
If the CalPERS board approves the changes next year, the US pension scheme will join the ranks of the Danish pension fund manager ATP and sovereign wealth fund Alaska Permanent Fund.
The California State Teachers' Retirement System (CalSTRS) is also considering a move towards AAC and will make a decision in February (Global Pensions: 1 November 2010).
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