Anas ALhajjar

8/9/2019 Anas ALhajjar

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MBA of Banking & finance

FUND MANAGEMENT & TREASORY OPERATION

Student name: Anas ALhajjar

Student ID: 110037722

Semester 2

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Title : Assignment

Submission Date : WEEK 4

Lecturer : Dr.Khairul Anuar
https://www.facebook.com/khairul.anuar.31945https://www.facebook.com/khairul.anuar.31945


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Instructions:

Review and summarise CalPERs investment policies.

You review should cover the following areas.

(a) CalPERS Investment Beliefs & Policy Statement;

(b) asset allocation;

(c) investment classes;

(d) ethics

(e) investment and risk management.


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(a) CalPERS Investment Beliefs & Policy Statement :

It is important to understand that the role of pension funds should not be to create

the market in which they invest. Pension funds, given their fiduciary duty, are

inherently conventional in their investment policies and do not take the kind of risks

required of early market makers. Pension funds provide liquidity in markets and exit

opportunities for individuals and organizations that engage in early risk-taking. To be

successful, investing in targeted private equity must be a profitable endeavor. The

most important best practice drawn from this case study is that success in pension

fund investment in urban revitalization is measured in terms of the risk-adjusted rate

of return rather than social impacts obtained. To paraphrase Lowenstein (1996), we

manage what we measure. Such focus allows the fund managers to meet their

fiduciary responsibilities without distraction. This is also the best way to benefit the

community, since theory suggests that, by filling capital gaps, the investor should both

receive excess returns and support economic development. If the investor does not

receive an appropriate return, it may be that they are not filling a true capital gap (i.e.

a gap that an efficient market would have funded), but are instead investing in

projects that an efficient market would have left unfunded. Calabrese (2001) lists the

comparability of fund returns to an appropriate benchmark as one of the common

characteristics of leading successful alternative investment programs. CalPERS does

not make concessions on risk/return criteria.CalPERS is the largest public pension fund

in the United States with approximately $275 billion in global assets and equity

holdings in over 9,000 companies. CalPERS provides retirement benefits to more than

1.6 million public workers, retirees, their families and beneficiaries and we rely on the

quality and integrity of market information to allocate capital on behalf of our

beneficiaries. Recently, CalPERS developed a set of Investment Beliefs that are

designed to provide a basis for strategic management of the investment portfolio.

Included in CalPERS Investment Beliefs is the view that Long-term value creation

requires effective management of three forms of capital: financial, physical and

human. CalPERS believes that strong governance, along with effective management


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of environmental and human capital factors, increases the likelihood that companies

will perform over the long-term and manage risk effectively.

A long time investment horizon is a responsibility and an advantage Long time

horizon requires that CalPERS:

Consider the impact of its actions on future generations of members and taxpayers.

Encourage investee companies and external managers to consider the long -term

impact of their actions.

Favor investment strategies that create long-term, sustainable value and recognize

the critical importance of a strong and durable economy in the attainment of funding

objectives.

Advocate for public policies that promote fair, orderly and effectively regulated

capital Markets.

Long time horizon enables CalPERS to:

Invest in illiquid assets, provided an appropriate premium is earned for illiquidity

risk.

Invest in opportunistic strategies, providing liquidity when the market is short of it .

Take advantage of factors that materialize slowly such as demographic trends.

Tolerate some volatility in asset values and returns, as long as sufficient liquidity is

Available.

Sub-beliefs:

Governance is the primary tool to align interests between CalPERS and managers of

its capital, including investee companies and external managers.

Strong governance, along with effective management of environmental and human


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capital factors, increases the likelihood that companies will perform over the long-

term.

and manage risk effectively

CalPERS may engage investee companies and external managers on their

governance and sustainability issues, including:

Governance practices, including but not limited to alignment of interests.

Risk management practices.

Human capital practices, including but not limited to fair labor practices, health and

safety, responsible contracting and diversity.

Environmental practices, including but not limited to climate change and natural

resource availability.

CalPERS strategic asset allocation process transforms the funds targeted rate of

return to the market exposures that staff will manage.

CalPERS will aim to diversify its overall portfolio across distinct risk factors / returndrivers.

CalPERS will seek to add value with disciplined, dynamic asset allocation processes,

such as mean reversion. The processes must reflect CalPERS characteristics, such as

time horizon and size of assets

CalPERS will consider investment strategies if they have the potential to have a

material impact on portfolio risk and return

CalPERS will balance risk, return and cost when choosing and evaluating investment

managers and investment strategies

Transparency of the total cost to manage the CalPERS portfolio is required of

CalPERS business partners and itself

Performance fee arrangements and incentive compensation plans should align the

interests of the fund, staff and external managers


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CalPERS will seek to capture a larger share of economic returns by using our size to

maximize our negotiating leverage. We will also seek to reduce cost, risk and

complexity related to manager selection and oversight

When deciding how to implement an investment strategy, CalPERS will implement

in the most cost effective manner

(b) asset allocation :

Many institutional and individual investors have an asset allocation policy that calls

for investing a specified percentage of the total value of a portfolio in each of several

asset classes. To conform with such a policy as market values change requires selling

assets that performed relatively well and buying those that performed relatively

poorly. Such a strategy is clearly contrarian and can only be followed by a minority of

investors. In practice, many investors seldom rebalance completely to conform with

their policy. On the other hand, many multi-asset mutual funds, increasingly used in

defined contribution plans, do so frequently, resulting in contrarian behavior. This

paper presents an alternative approach, in which an asset allocation policy adapts as

markets move, taking into account changes in the outstanding market values of major

asset classes. Such policies can take important information into account, reduce or

avoid contrarian behavior and could be followed by a majority of investors.CalPERS

ASSET ALLOCATION STRATEGY : CalPERS diversification strategy is for an ongoing goal

to maintain targets and ranges within their asset allocation mix. To ensure prevention

of large losses and to preserve capital.Traditional asset allocation uses a fixed ratio to

distribute assets among different investment categories. The ratio is typically

determined based on parameters such as an investors age, financial objectives or risk

tolerance.Asset Allocation The starting point and most important element of CalPERS

successful return on investment is our asset allocation - our diversification among

stocks, bonds, cash and other investments.Asset allocation is not an asset-only or

liability-only decision. All factors, including liabilities, benefit payments, operating

expenses, and employer and member contributions are taken into account in


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determining the appropriate asset allocation mix. Our goal is to maximize returns at a

prudent level of risk - an ever-changing balancing act between market volatility and

long-term goals.CalPERS follows a strategic asset allocation policy that identifies the

percentage of funds to be invested in each asset class. Policy targets are typically

implemented over a period of several years on market declines and through dollar

cost averaging.

(c) investment classes :

As the nation's largest public pension fund with assets totaling $277.2 billion as

of October 31, 2013, CalPERS investments span domestic and international

markets.The CalPERS Board of Administration has investment authority and

sole fiduciary responsibility for the management of CalPERS assets. With theBoard's guidance, the CalPERS Investment Committee and Investment Office

carry out the daily activities of the investment program.CalPERS has generated

strong long-term returns by effectively managing investments to achieve the

highest possible return at an acceptable level of risk. The CalPERS portfolio is

diversified into several asset classes, so any weaknesses in one area are

offset by gains in another. The Board follows a strategic asset allocation policy

that targets the percentage of funds invested in each asset class.


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(d) ethics :

CalPERS Toughens Ethics, Accountability a Track Record of Reforms and Acti

ons CalPERS has taken aggressive steps to implement policies and reforms that strengthen the pension fundsaccountability and ethics, and to ensure full

transparency.These actions have included:

Strongdisclosure policies and rigorous regulation of placement agents.

Tough rules for communication between Board Members and staff about inves

tment proposals .

Authorityto discipline Board members who violate policy .

The pursuit of information and a special review to ensure CalPERS has not be

en victimized by placements agents .

A ban on gifts to employees from business partners and potential business

partners The actions are aimed at providing CalPERS members, employers

and the public complete confidence in the Systems investment decision

making process and ensure the CalPERS Board is meeting its fiduciary duty.

(e) investment and risk management

CalPERS Risk Management System

CalPERS uses the Risk Management System to provide a comprehensive

framework for measuring, monitoring and managing risk. This system is based

on a quantitative model designed to produce a forward looking view of marketvolatility for the CalPERS Total Fund. The Risk Management System has been

in place for a number of years and is currently being reviewed to determine

which components should be updated.The Risk Management team began work

in early 2009 to enhance and enlarge the concept of risk to include additional

measures such as counterparty risk, concentration risk, leverage and liquidity.


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These measures are intended to supplement the existing volatility measures

and to provide a more complete assessment of risk. The sources of risk to

CalPERS are constantly changing and managing those risks requires a more

flexible approach to effectively identify, measure and communicate investment

risk.The Risk Management team uses these risk measures in combination to

achieve a Total Fund view of the investment and risk profile at CalPERS, to

increase return on risk taken, and establish risk as a key consideration in the

investment decision-making process. These risk measures are intended to help

us answer the question how are we doing? They provide CalPERS with a

methodology to integrate expected returns with risk management and to

incorporate risk targeting and measurement into the daily portfolio

management process.The Investment Committee receives quarterly risk

updates based on these risk measures. The Committee also receives analysis

of the risk impact to CalPERS Total Fund of new investment strategies. Risk

management at CalPERS will continue to be an integral and evolving

component in the investment decision-making process.

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Anas ALhajjar