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CalPERS to align staff and external manager incentives with long-term investment horizon

Giant fund adopts set of 10 investment beliefs

The California Public Employees Retirement System (CalPERS), the largest US pension plan, says it wants to align the incentives for its own staff and external managers with its long-term investment horizon.

The more than $265bn (€198bn) fund acknowledges that its long time horizon – a key element of a newly adopted set of investment beliefs – poses challenges in aligning its interests with those of its employees and the fund managers its employs.

But it says staff performance plans “should include additional objectives of key performance indicators” to align them with its long-term goals alongside being measured relative to a benchmark.

And each asset class should have “explicit alignment of interest” principles for its external fund managers, the fund adds.

There’s little detail about how this alignment will occur; the set of beliefs is designed to give it an overarching philosophy for making investment decisions.

The fund’s long-term horizon is seen as both a “responsibility and an advantage” in the document, whose development was kicked off in 2012 and which involved investment consultants Towers Watson and a series of public workshops, as previously reported by RI.

It requires the fund to consider the impact of its actions on future generations and encourage companies it invests in – and its external managers – to “consider the long-term impact of their actions”.

It also means it must favour investment strategies that create long-term, sustainable value and recognize the critical importance of a strong and durable economy.The long-term view enables it to invest in illiquid assets and opportunistic strategies and take advantage of slowburn factors such as demographic trends.

One of the beliefs is that long-term value creation requires effective management of three forms of capital: financial, physical and human.

“These beliefs are another important step in the recovery of CalPERS, providing a clear direction and philosophy for investment decisions,” said CalPERS’ Chief Investment Officer Joe Dear. They will be integrated into the culture of its investment office. Link

CalPERS’ Investment Beliefs:
1. Liabilities must influence the asset structure
2. A long time investment horizon is a responsibility and an advantage
3. Investment decisions may reflect wider stakeholder views, provided they are consistent with fiduciary duty
4. Long-term value creation requires effective management of three forms of capital, financial, physical and human.
5. CalPERS must articulate its investment goals and performance measures and ensure clear accountability for their execution.
6. Strategic asset allocation is the dominant determinant of portfolio risk and return.
7. CalPERS will take risk only where we have a strong belief we will be rewarded for it
8. Costs matter and need to be effectively managed
9. Risk is multifaceted and not fully captured by volatility and tracking error measures
10. Strong processes and teamwork and “deep resources” are needed to achieve CalPERS’ goals.