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CalPERS Risk-Factor Approach to Asset Returns

peopleHistorically, investors have heavily relied on the equity risk premium to reach annual return targets. The confidence of this model has been tested. Mean-variance optimization models did not help out asset owners during times of catastrophe. Like many large institutional investors, the California Public Employees’ Retirement System (CalPERS) is rethinking its approach to asset allocation and portfolio diversification. During the global financial crisis, both bonds and stocks dropped – the correlation between the two major asset classes turned positive. This paradigm shift from traditional asset classes to a risk-factor stance is still new territory. There is no industry standard or consensus on risk factors.

Economic Periods Length Prized Factors – Park Alpha
Decade of Lowered Inflation 1982-1991 Inflation
Rising Bull Market 1992-1999 Credit, Liquidity, Growth
Post-Tech Hangover 2000-2003 Real Interest Rates, Liquidity
Housing Boom 2004-2007 Growth, Political
Great Recession 2008-2011 Real Interest Rates
The Long Road to Recovery 2012-Present

 
Major events and crises force board members and investment staff to rethink their investment model. The theory of risk-factor allocation is that if a single risk factor harms a portfolio, the impact is confined within allocation to that risk factor. Investment consultants tend to look at average asset class returns. On the other hand, the risk-factor approach addresses the cause rather than effect. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Asian Sovereign Funds Not Slowing Down on Tech Investing

According to data from SWFI’s Sovereign Wealth Fund Transaction Database, Asian sovereign funds invested US$ 6.05 billion directly into companies and assets in the information technology sector from Jan 2017 to November 22, 2017. In a comparable time frame from Jan 2016 to November 22, 2016, this same group of Asian sovereign funds directly invested US$ 5.02 billion in the sector. These are direct investments, not fund commitments or manager allocations.

Asian sovereign funds such as GIC Private Limited, Temasek Holdings and the Korea Investment Corporation (KIC) have demonstrated bullish signals to the technology community over other sectors. GIC and Temasek have also been major investors in the private side of deals, funding a wide range of tech startups, while providing financial firepower in buyout transactions.

Some notable direct tech investments in 2017 by sovereign funds include Meituan-Dianping, SoundCloud, Nets A/S, Visma AS, Turn, Inc. and Vantiv.

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Future Fund Makes a Guardian Out of Former J.P. Morgan ANZ Chair

The Australian government has appointed Robert Priestley – current non-executive chair of J.P Morgan for Australia and New Zealand (ANZ) and a non-executive director of ASX – to serve on the Future Fund Board of Guardians for a five-year term from November 7, 2017. Priestley replaces former Morgan Stanley Australia chief executive Steven J. Harker.

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Associated British Ports Reboots Property Development Arm to Capitalize on Land Bank

Associated British Ports (ABP) – operator of 21 major ports throughout the United Kingdom – has announced a reboot of its ABP Property division, complete with a new team of specialists in commercial development and logistics led by Huw Turner, in order to identify and develop strategically significant locations in its 2,372 acre land bank.

ABP is owned in large part by a consortium of pensions and sovereign funds, including the Canada Pension Plan Investment Board (CPPIB) at 33.88% ownership, OMERS at 30%, Singapore’s GIC Ventures Pte Ltd at 20.00% ownership, and the Kuwait Investment Authority at 10.00% ownership. Large institutional investors such as sovereign funds, pensions, and endowments have slowly increased allocation towards infrastructure over the past six years as an alternative to equities and bonds, according to asset allocation data from SWFI.

Plans

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