First up is the CALPERS interview. There was a money quote and the fund's allocation.
Global Equities 49%
Fixed Income 20%
Private Equity 14%
Real Estate 10%
Inflation Linked Including Commodities 5%
CALPERS had to increase the target for private equity because the value of everything else fell so much it raised the weighting to private equity. This is the same concept I talk about with using SDS. If the market falls a lot SDS will grow to a larger weight in the portfolio thus hedging more. As I understand the article, had they not done this they would have been forced to sell some of their PE exposure.
The fund is trying to make it's "assumed rate of return of 7.75%." The brings up an important point. Many people think in terms of the stock market averaging some percent every year. Maybe the number is 10% or 8% or something else but something. Unfortunately reality is much lumpier than 9% per year. Whatever the real number is it includes all the 1997s, 2008s and everything in between.
Pensions and endowments cannot be very flexible with what they payout for their obligations but you can be--maybe. Obviously living below your means helps here. When the market has the occasional really bad year (not talking a 10% decline) you have a better chance of cutting back on certain expenditures than a pension fund does.
The money quote;
To try to capture more growth, we have to look at expanding our allocations in emerging markets. In emerging markets over the past year, we've greatly increased international exposures.
So they need to increase their foreign exposure to get the growth they need. That should sound familiar to long time readers. This has been an ongoing theme and I am convinced it will continue to become ever more important. I would note this does not have to mean 30% in emerging.
The table is from Barron's and shows the allocations of several college endowments. It seems that things were great for a long time and then market declined which coincided with liquidity problems and now the entire endowment theory is being called into question. Well Byron Wien as questions anyway.
The article is a good read and I certainly am interested in what happened and what changes there may be as a result of 2008 but I am more interested in what you and I can learn from all of this; benefiting from their mistakes if there were any mistakes.
One of the ideas that emerged from the article was that returns in the future will be less than they were in the past. Perhaps that is correct but I had one encouraging thought for the endowments to the extent they continue to invest with hedge funds. If US interest rates go up as much as some people think there will be some hedge funds that go up several hundred percent shorting the bond market and perhaps the endowments will own such a fund.
In looking at the table you can see how heavy they are in alternative assets (so also illiquid) and how they did. A big focus over the years here has been all things in moderation and I don't think the above weightings in the alternative stuff is moderate, far from it. Anyone, anywhere caught up in some sort illiquid asset implosion had no control over what happened and probably could not have anticipated the totality of what happened but they did have control of how much they allocated to these things.
A little can go a long way. People have a tough time with that one but all I can say is it is true and simple.