In a Wall Street Journal editorial, Ben Meng, the Chief Investment Officer of the California Public Employees’ Retirement System, announced their goal of achieving a risk-adjusted return of 7% would require a strategic change based on investing in “better assets” and “more assets”.
Calpers is the largest defined-benefit public pension fund in the U.S., so changes in their strategy can be an important bellwether.
According to Mr. Meng:
Calpers must diversify and increase exposure to private assets, such as private equity and private credit. We refer to these as “better assets” because they have the potential for higher returns and lower expected volatility when compared with publicly traded assets.
“More assets” refers to a plan to use leverage, or borrowing, to increase the base of the assets generating returns in the portfolio. Leverage allows Calpers to take advantage of low interest rates by borrowing and using those funds to acquire assets with potentially higher returns.
Using leverage to buy illiquid assets does not sound like a good idea to me. Banks and pension funds
used a similar strategy prior to the Global Financial Crisis, investing in illiquid mortgage backed securities (MBSs) and collateralized debt obligations (CDOs), and that didn’t turn out well.