Panel, Conference Presentation
Institutional Investors: Where in the World Will Returns Come From?
- CalPERS funded status is projected to continue improving from 73%, with a maintained 7.5% target rate of return deemed attainable despite historical returns of 8.1% over 10 years and 8.6% pre-crisis; a 7.25% actuarial target is also referenced as a goal requiring reduced fixed income allocation.
- Risk management strategies include potential tail hedging programs, minimum volatility strategies, and fundamental indexes with a decision expected by year-end, while acknowledging that 10 years of slow growth cannot be hedged out due to prohibitive costs and that interest rates are expected to rise eventually.
- Alternative asset allocation proposals aim to increase exposure to 40% to enhance flexibility, with a specific 12-month outlook identifying opportunities in credit, active equity, debt, real estate, and stressed real estate to offset low fixed income returns of 2% to 4%.
- Portfolio diversification plans involve increasing equity, real estate, and private equity positions in Brazil and increasing direct investment exposure to high-growth markets like China and Brazil, which currently constitute 8% of the portfolio, with a strict requirement for substantial local partners.
- Investment opportunities in Europe are anticipated to emerge as balance sheets clean up, offering high-quality assets in mid-caps and infrastructure at decent prices, though political hesitation and exogenous risks remain a concern for the timing of recovery.
- The U.S. energy boom presents further diversification opportunities, and internal management models are preferred for infrastructure and long-term assets to bypass the turnover pressures typical of private equity funds.
- Potential risks include large drawdowns similar to 2008-2009 requiring growth rates well above 7.5% to recover, currency problems or interest rate adjustments, and the difficulty of finding sufficient partners in a slow-growth environment due to manpower constraints.
- Private equity returns in Brazil are expected to exceed domestic averages due to governance restructuring needs in consolidated sectors, while indirect participation in high-growth markets is also targeted through global firms expanding into emerging middle classes.