CNBC Stock Blog

Calpers Cuts Stock Allocation, Sees Low Returns: CIO

The California Public Employees Retirement System is as worried as any investor about the uncertainty in the U.S. and Europe.

That's why Calpers, as it is known, is a "longterm trader" that is playing down equities, Chief Investment Officer Joe Dear told CNBC Wednesday. He indicated the Calpers portfolio is "underweight" equities by about 4 percent from its typical allocation.

CalPERS CIO: Managing Market Risk

"There’s so much uncertainty," said the CIO of the fund covering 1.6 million public employees. "You have massive uncertainty about the ability of political leaders to deliver the tough decisions that have to be made. All the growth forecasts for the developed markets are declining. That is not good for [the] equity outlook."

With uncertainty and a cut in its stock portfolio, the fund has had to come up with alternatives in order to maintain a target of a 7.75 percent return, he said.

"We had a fabulous year (for fiscal 2011), one for the books" of over 20 percent, he said. "We knew it wasn’t going to continue."

CalPERS Investment Strategy

He said the outlook for the next five years "is pretty subdued, a low-return environment. "Pension fund managers are long-horizon investors. We can ride out the ups and downs of the markets. But with low interest rates and a relatively small equity risk premium you have a hard time getting that 7.75...The job gets harder every day."

Calpers still has a "huge exposure in risky assets. We have $100 million in equity. We didn’t leave the market."

The fund also has a large private equity position and has increased its allocation in short-term Treasury bonds. What it no longer has is exposure to European banks, which Calpers, along with other investors, shed in August, Dear said. Calpers has a minimum exposure to European sovereign debt .

For that to increase "there’s got to be enough liquidity in the system for the banks and the sovereigns for us to have confidence that no matter how bad it gets, there’s not going to be a systematic breakdown and a contagion in the credit markets. And we’re not even close to that."


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Disclosure information was not available for Joe Dear or his pension fund.