CalPERS to Alter Fund Management

The California Public Employees’ Retirement System, the nation’s largest public pension fund and a major institutional investor, said Monday that it is overhauling management of its domestic holdings.

The $110-billion fund, which provides benefits to more than 1 million current and former state employees and their families, said it is beginning to actively manage more of its domestic holdings itself.

The fund also said it is changing the way it contracts with external managers and revamping its pay-for-performance fee schedule to attract more managers capable of adding value to the fund.

“Today’s actions will help us capture significant returns in a market full of opportunity at minimum risk,” said Charles Valdes, chairman of CalPERS’ investment committee. “We’re maintaining our passive portfolios as a sound foundation, seeking aggressive equity managers and adding a specialized investment portfolio to control risk.”

About 84% of CalPERS’ domestic equities--about $39.3 billion--is now passively managed internally, while another 13% is actively managed by external managers.

Under the new structure, as much as 20% of the portfolio will be actively managed in-house, CalPERS said.

The agency also approved a search process for new external managers and said the volume of each new manager will be measured against specialized benchmarks, rather than more general market indicators such as the Standard & Poor’s 500 index.

Also, the pay of these managers will hinge more on the performance of the portfolios they administer, CalPERS said.

“When a manager performs well, the firm will be compensated,” Valdes said. “When performance lags, CalPERS will pay a lower fee.”