Institutional Investors: Where in the World Will Returns Come From?

Panel Context & Participants:

• Moderator: Tom Fink, Chairman and CEO of Babson Capital Management.
• Joe Deere: CIO of CalPERS (California), managing $260 billion; fund recovered from a $100 billion loss (peak-to-trough) to return to pre-crisis levels.
• Janet Cowell: Treasurer of North Carolina, managing $80 billion; seeking General Assembly approval to increase alternative asset allocation from 20% to 40%.
• Michael Sabia: CEO of Caisse de dépôt et placement du Québec (Caisse), managing over $176 billion; advocates for "selectivity" over traditional asset class categorization.
• Maurício Wanderley: CIO of Datala (Dalla), managing over $8 billion; focused on Brazil with a historical 20% annual average return over 10 years.

Target Return Rates & Funded Status:

• CalPERS target return is 7.5%; recent 10-year average is 8.1%, with a current funded status improvement from 60% to 73%.
• North Carolina targets a 7.25% actuarial return, necessitating a shift out of fixed income (currently 35%) and into higher-yielding assets.
• Caisse manages for 29 depositors with an arithmetic average target return of 6.7%.
• Datala achieved a funded ratio of approximately 200% due to high domestic fixed income yields, allowing for a 75% increase in base benefits four years ago.

Portfolio Strategy Shifts & Risk Management:

• CalPERS maintains over 90% of portfolio risk in growth assets (equity-heavy) but is actively exploring tail hedging, minimum volatility strategies, and low-beta hedge funds to mitigate drawdown risks.
• North Carolina plans to introduce a 40% allocation to alternative assets to meet return targets, though it remains constrained by state legislative approval processes.
• Caisse has moved away from relative return benchmarks (index tracking) toward absolute returns and a strict "understandability" filter, rejecting complex financial engineering and high-leverage strategies.
• Datala is pivoting from a fixed-income-heavy portfolio (60%, 90% inflation-linked) toward diversification (25% equity, 8% private equity, 8% real estate) as Brazilian interest rates decline.
• All panelists emphasize "selectivity" as the primary driver for future performance, moving away from broad market index exposure.

Regional Investment Outlook:

• Emerging Markets: Datala identifies private equity in Brazil's mid-market (consumption, logistics, infrastructure) and oil/gas sectors (e.g., pre-salt projects) as key growth areas; direct local equity access is limited, necessitating private market exposure.
• High-Growth Markets: Caisse holds 8% direct exposure to high-growth markets (China, Brazil), preferring indirect exposure via Canadian resource firms with Chinese demand, and requires substantial local partners for all direct investments.
• United States: Panelists view the U.S. energy boom and infrastructure as significant opportunities, though North Carolina notes the difficulty of scaling large fund deployment in specific regions like North Dakota.
• Europe: Deere and Sabia view Europe as a source of opportunity in distressed debt, mid-cap loans, and infrastructure, provided entry prices are right; Sabia warns that bank liquidity injection has delayed necessary balance sheet cleaning, limiting current pricing dislocations.

Operational & Structural Changes:

• Internalization: Caisse manages 87% of its portfolio internally at a cost of $0.17 per $100 of assets; CalPERS internally manages 80% of equities and 92% of fixed income to reduce fees.
• Direct Investing: Panelists argue that long-term institutional investors can secure "prize assets" (e.g., critical infrastructure) more effectively through direct stakes or co-investments than via traditional private equity funds, which face imperatives to exit portfolios within 4–5 years.
• Fee Management: Cowell notes that reducing fund-to-fund fees ($18 million annually for North Carolina) allows for the hiring of internal staff, though scaling internal teams in private assets remains a labor market challenge.
• Legislative Constraints: North Carolina's "sole fiduciary" status is checked by the General Assembly, requiring legislative permission for major allocation changes like the proposed 40% alternative cap.

Forward-Looking Statements & 2013 Outlook:

• CalPERS: Mildly optimistic about a slow-growth environment; expects political systems to respond incrementally and sees opportunities in housing and global growth markets (China, Brazil).
• North Carolina: Cautiously optimistic, focusing on credit, active equity, stressed real estate, and real estate; seeks maximum flexibility to deploy capital.
• Caisse: "Cautiously optimistic" with a moderately offensive posture; identifies high politicization of markets (monetary policy, European stability) as a primary risk requiring constant vigilance.
• Datala: Continues long-term trends of diversifying locally (equity, real estate, private equity) and seeking international opportunities; does not focus on short-term tactical moves.
• Macroeconomic Warning: Panelists note that low central bank rates distort markets, creating artificial safety that may mask underlying asset risks and necessitate careful selection of assets rooted in the real economy.