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Okay. Thank you. We will reconvene the meeting and we will resume with Item number 7, Proposed
Repeal of Barclays Aggregate Program Policy initial
review. Mr. Ishii. SENIOR INVESTMENT OFFICER ISHII: Curtis Ishii,
Senior Investment Officer, Global Fixed Income. We are
proposing to get rid of the Barclays ag policy. The
assets have been outsourced in October. There's no
clients, there are no assets, so we believe there
shouldn't be any need for a policy. This is an
information item. Just to remind you that if you wish,
you could make this an action item so it doesn't have to
come back in February. Wilshire does not have any problem
with this. And with that, I have -- I'm here for any
questions CHAIRPERSON JONES: Okay. We do have a few
questions and maybe comments. The first one, Dr. Diehr.
VICE CHAIRPERSON DIEHR: Move -- COMMITTEE MEMBER MATHUR: Second.
VICE CHAIRPERSON DIEHR: -- repeal the -- (Laughter.)
CHAIRPERSON JONES: Something was moved by Dr.
Diehr (Laughter.)
CHAIRPERSON JONES: And second by Mrs. Mathur. (Laughter.)
CHAIRPERSON JONES: And I see two requests to speak. Do you still want to speak on this
after the motion or -- ones gone. What about you?
Mr. McGuire. ACTING COMMITTEE MEMBER McGUIRE: Actually
-- Mr. Chair, actually, I'm disappointed I didn't
get to make this motion --
(Laughter.) ACTING COMMITTEE MEMBER McGUIRE: -- because
I know how anxious Curtis is to get any reference
to that term out of the policy. So anyway, I fully
support the motion.
CHAIRPERSON JONES: Okay. Sounds great. VICE CHAIRPERSON DIEHR: For the record, the
motion probably should be stated. CHAIRPERSON JONES: Yes, state it. Go ahead.
VICE CHAIRPERSON DIEHR: So the motion is to repeal the Barclays Aggregate Program Policy.
CHAIRPERSON JONES: And you still second, Mrs. Mathur, right?
COMMITTEE MEMBER MATHUR: Yes, I do. CHAIRPERSON JONES: Okay.
COMMITTEE MEMBER JELINCIC: I was just going to
ask what the motion was. (Laughter.)
CHAIRPERSON JONES: Okay. So no further questions. All in favor?
(Ayes.) CHAIRPERSON JONES: Opposed?
None. The item passes. You do not have to return, Curtis.
(Laughter.) CHAIRPERSON JONES: Okay. We'll move on to
Item number 8, on the allocation -- Asset Allocation,
Performance and Risk Category, Comparison of CalPERS
Liquidity Options. Mr. Baggesen.
SENIOR INVESTMENT OFFICER BAGGESEN: Good afternoon, Eric Baggesen Senior Investment
Officer for Asset Allocation and risk.
Item 8a is an agenda item that was prepared at
the request of an Investment Committee members during the
November asset liability workshop. This agenda item tries
to look at the different alternatives that we have within
the Investment Office for meeting liquidity needs that
come up within the portfolio, and also deals with the
whole element of the actual target allocation to the
liquidity asset class or asset segment. The current allocation to liquidity is four
percent. The constraint that was applied to the information that was presented in the
November workshop was two percent. We then got an indication
from you, as Investment Committee members, for the, I guess,
either acceptance or disagreement with that constraint
as it was applied.
The indication that we had was that 64 percent agreed with the two percent number, 18 percent
preferred a one percent allocation to liquidity. And then
there was a nine percent, or a single individual, both
at a zero percent target allocation to liquidity and
also at a three percent target allocation to liquidity.
So sort of the central tendency was around the
two percent number possibly pushing down towards a one
percent allocation. Our objective with this agenda item
is really to elicit from you, you know, how strongly you,
as a group, are leaning towards the two percent number, a
one percent number, or potentially any other alternative
that's there. The agenda item really tries to specify the
elements that we think of as being sources of liquidity
within the portfolio. The sources of liquidity have been
broken into two different aspects. One, are assets that
are capable of being sold in the marketplace and converted
into cash, so that that cash can be redeployed for some
other purpose or to meet some kind of an obligation or liability of the organization?
And then down the whole topic of borrowing. And
I think it is the borrowing category that has created, to
some extent, some of the conversation that we've had
within this area of liquidity. And borrowing is being
viewed from the perspectives where we have two current
capabilities that are facilitated by having this internal
management of both the security lending program and also
of equity trading activity within the organization. The third alternative for borrowing is the
potential of establishing a line of credit. One of the
benefits of a line of credit, or there's several benefits
to a line of credit are that it is -- once it is
established, it's very simple to use. It simply takes a
phone call to basically drawdown capital against a line of
credit. And a line of credit also has -- (Thereupon a cell phone rang.)
SENIOR INVESTMENT OFFICER BAGGESEN: Somebody owes five bucks.
A line of credit also has typically an established term, where the term can be anywhere
from three to five years. So that those two aspects
make a line of credit fairly simple and understandable
to execute.
The downside of a line of credit is the expense of established too -- the expense of establishing
the line of credit and then the expense should you
drawdown capital against the line of credit.
It should be noted that all of the mechanisms that use borrowing as a way of satisfying
the liquidity need all have the facility or create leverage
within the program. So ultimately, unless we significantly
change the structures of leverage within the CalPERS
portfolio, borrowing is not a long-term solution to meeting
the liabilities and the obligations of the organization.
It is predominantly a tool that can create the
benefit of providing time.
And time is useful from the perspective of being
able to make a better assessment of the different places
where liquidity can be made or raised from the portfolio,
so you can make a more informed choice. And time also
potentially allows for the receipt of cash that may be
coming from some other place, for example, a large
contribution into the fund, it could be a return of
capital coming from a private equity or a real estate type
of transaction. So it can be a mechanism to bridge across
the need for money against the time point where money
might be received from other sources. So there's definitely some utility to the whole borrowing
mechanism. If you flip into page two and three of the
agenda item, we put together a simple table. And it's table --
identified as Table number 1. In this table, we tried to
actually assess and categorize the costs that are attached
to selling different parts of the portfolio. And selling
assets, obviously from a liquidity perspective, has really
got to be concentrated within the publicly traded assets.
Even though private assets are frequently bought
and frequently sold, the timing of those transactions is
very capricious, so therefore those assets are not
typically viewed as being a good source of liquidity for
any need. And we would really like to focus your
attention that the needs for liquidity that the liquidity
allocation and the sort of fall-back provisions for
raising liquidity, the liquidity needs that we're talking
about are unanticipated needs for liquidity. Part of our everyday, ordinary management
of the CalPERS investment portfolio is managing the
liquidity profile for all of the obligations that we
understand to be, you know, being brought before this organization.
And those can be obligations as far as paying benefits to the beneficiaries, the expenses
of running the place, and so on it goes. So the day-to-day
management of those usually fairly forecastable expenses,
that's just a part of the actual ongoing management profile.
So we take care of that in our basically daily, weekly,
and monthly activity. So the real liquidity issue is if you get
faced with an unanticipated demand for capital.
And those unanticipated demands can happen predominantly
through two different areas. One is that an investment
opportunity somehow presents itself and requires, you
know, a fairly immediate movement of cash in order to take
up on that investment opportunity.
That's a fairly infrequent activity, because typically any significant transaction actually
has a fair amount of time built into it for the negotiation
and the actual establishment of how money moves. And
the other place where we have potentially unanticipated
needs is in relation to any securities that have a derivative
exposure. So, for example, if we're holding futures
contracts and the market moves a significant amount, that
can either spend -- or raise a lot of capital and move it
into the organization or it can cost a lot of capital. So
the more volatile the underlying asset exposures are in
relation to those derivatives, the more -- the potential
is to have an unanticipated capital call happening from
that area. The other sources of unanticipated activity,
and it's really not that unanticipated, it is
the capital call activity that comes from private equity and from real
estate. But typically, we receive a notification on that
and have a period of time when we can raise those funds.
Anyway, if we go back into Table 1, this table is
organized to basically identify the sections of fixed
income and equities that -- just large brackets of
exposure. So we have treasuries, we have agency mortgages, corporates. In the case of fixed
income, we've got domestic, developed international, and
emerging markets in the case of equities.
The exposure columns list the amount of assets that CalPERS has in these buckets. These are
just estimates and are approximations of our typical
exposure. We then asked the trading areas to identify
how log it would take to raise a billion dollars out
of each of these segments of the market.
You can see in the case of fixed income, within a
day's time period, you can easily raise a billion dollars
out of either the treasuries or the agency mortgages. If
you're talking about corporate bonds, it could potentially
take you a month to raise a billion dollars. So we would
not identify corporate bonds as being a real liquidity
source. When you move into equities, you see that
we have significant exposure in both the domestic
and the developed international areas. Those exposures add up to
over $100 billion. You can raise a billion dollars in the
public equity markets, domestic equity markets. And I
think a half a day is being very conservative. You can
typically do that in probably less than an hour.
In the developed markets, a day again for a
billion dollars. And you see the costs that are attached
to these, expressed in basis points. And then we also
asked the trading desk how much could they raise
reasonably, reasonably in a three-day period? The fixed income team indicated they could
sell the entire treasury position in three days,
at an approximate cost of about three basis points.
That is the most liquid asset that we have when you think
of liquidity in terms of low cost and the ability to move
a significant amount of it.
Agency mortgages, a little bit less liquid, still
very low cost at coming at about 10 basis points. And
then you get into the equity exposure where we have two
segments that we could sell, a reasonable estimate we
think, is $10 billion that we could raise in a three-day
period, albeit the expenses are significantly higher,
ranging from 25 to 43 basis points. And note that the expenses do not stay constant
if you're raising a billion dollars compared to if you were trying to raise, let's say,
$10 billion, the expenses increase. And that increase is because of
the anticipated market impact by the presence of your order.
So the prices start to move against you the more
frequently you go into the marketplace and transact. And
just as corporate bonds are not a liquidity source
in the fixed income area, emerging markets we would not
consider a particularly desirable liquidity source in
the equity area, even though you can raise and transact
significant amounts. The expenses are starting to get
pretty high. So we went through that part of the analysis.
Then if you would flip onto page four of seven in
the agenda item -- CHAIRPERSON JONES: Excuse me, Eric. Priya,
has a -- Mrs. Mathur has a question.
COMMITTEE MEMBER MATHUR: Would you mind if I
just ask a question on that table that you just went
through, Table 1. SENIOR INVESTMENT OFFICER BAGGESEN: Sure.
COMMITTEE MEMBER MATHUR: So is this, in any market environment? Does this reflect our
ability to transact in any market environment?
SENIOR INVESTMENT OFFICER BAGGESEN: We would assume these numbers hold in a normal market
environment. In a stressed market environment, for example,
what we experienced in the sort of 2008-2009 time period, the
liquidity was absolutely there. The price impact goes up.
The pricing goes up, because you basically have to entice
people to transact with you. We have not -- in the time period I've been
involved in trading these assets, which is almost 30
years, I've never seen a time period where you cannot sell
equity securities where the regulators will actually allow
the market to stay open. So there is an environment out
there, a stressed environment or some kind of a crisis
that can take place that can absolutely shut down the
liquidity of the marketplace. Without a doubt, that can
happen. In that kind of an environment, the regulators
do not allow the marketplace to actually attempt
to operate if it's going to fail. They close the market.
They did that in 2001 with the 9/11 crisis. They've
done that in a number of different areas. Where the market
starts to sell off, they basically, in essence, route
orders into a sidecar where it all stops. For example, if
there's too much volatility hitting the New York Stock
Exchange and the futures market, they will slow down activity.
They will call a trading halt to allow buyers and
sellers to sort of reset and recalibrate what they're
doing. So the regulators do not allow the marketplace to
attempt to operate when it cannot do so. And we have to trust that they will continue
to execute that capability and that control in
the marketplace, because to fail to do that, you
end up with something like the flash crash, which basically
had a massive price shearing because of just an
unconstrained marketplace, a market that could not react
to the information that was flowing through the electronic
systems. But typically, those market closures are very
short duration activities. And generally also, when a
market is incapable of operating, you literally do not
have opportunities to start moving lots and lots of money
around the marketplace, nor do you typically have to
satisfy lots of other liabilities. Albeit, if we have
checks that have been written against CalPERS to our
beneficiaries, we'd want those checks to clear. So as
long as the banking system is operational, we would want
CalPERS to have sufficient resources to meet all of the
promises of payments that its made basically. And that's what, in essence, the liquidity
allocation does. The two percent number that was put in
front of you during the ALM was a number that was arrived
at as a consensus judgment by the Investment Office staff,
and the Finance Office staff with the assistance of the Chief Financial Officer.
They are the body that basically ensures that CalPERS -- they control the CalPERS checkbook.
So they need to understand if they're going to attest
that the organization can meet its liabilities, how
much capital is on hand and what are the potential sources
of volatility that could impact the amount of -- when I
say capital, it's really cash, and it's U.S. dollar cash,
because that's what we settle our obligations in,
generally speaking.
So that two percent number was a number that we
agreed upon, that given the volatility numbers and the
management tools in place, we thought was a reasonable
spot to move from the four percent current allocation to
the two percent category. Albeit, any allocation to liquidity carries
with it an opportunity cost, because liquidity
is the lowest returning asset segment that we have in the
CalPERS strategic asset allocation opportunity set.
Are there any other questions on Table 1 or should we flip over to some of the --
CHAIRPERSON JONES: No, we don't have anymore. No, we don't have any further questions.
SENIOR INVESTMENT OFFICER BAGGESEN: Okay. Perfect. If we flip to page four, just on
the borrowing capabilities, you see the information on line
of credit, securities lending, and synthetic equity,
you can see in the last column the difference in the cost
structure. And the cost structure is reflected, for example,
in the line of credit is when you actually draw the line
of credit, when you start to basically pay LIBOR plus
a spread on top of that activity.
Chart number 1 on the same page is a line chart
that indicates proxies for what we believe represent the
cost structures of the different borrowing sources that
have been identified. Without a doubt, you also see the
gray bars on those charts, and those are periods when the
proxy, the index that's being used, which comes from
Thomson Reuters, they were not able to any quotes for a
line of credit basically in those market environments. That does not mean that the line of credit,
if it had been established, could not be executed.
It simply means that they did not have access to information
coming in, in order to maintain a continuous index
over that time period.
So any organization that had an agreement with a
big banking entity or a financial entity to have a line of
credit in 2010, typically they were able to draw that line
of credit down, even though there were no quotes coming in as far as the structure.
This chart is really just informative in the relative positioning of the lines. The least
expensive, on average element, to raise liquidity is
accessing borrowing through the facility of securities
lending, where CalPERS lends parts of its portfolio
to borrowers, who then -- those borrowers then provide cash
to CalPERS to collateralize that borrowing position.
When we receive their cash, we, in essence, have
to pay something that's approximately the equivalent of
the fed fund's rate on that cash, and that's the borrowing
cost that we experience. And while we do that, we retain
the exposure to the market exposure to the underlying
assets that were loaned to them in the first place. So
CalPERS maintains its market exposure in that environment.
The middle line in this tends to be the cost and
it's typically floating around a three-month LIBOR number.
That's usually what is attached to using equity derivatives as a proxy for a long exposure.
And then the blue line, the darker line, is the proxy that
we were able to obtain from Thomson Reuters to act as a
proxy for a line of credit cost.
And again, I would just point out, it's the relationship between those lines, and you
actually see, following the sort of crisis environment that
we had in '08 and '09, the spread between the blue line and the
other two lines is actually increased and maintained a
higher spread than it had been before that crisis. And I
think that that's just a reflection of the change to the
banking environment and the financial environment. The costs that we have in this whole agenda
item were a reflective of a request to get a $5
billion credit line. So that was the number that was put
out to four different financial entities basically to
come up with an estimate of those expenses.
The line of credit costs, there's a number of
things. You see these on page five of the agenda item.
There's different types of fees. So you typically will
pay an upfront fee, which is a one-time cost in order to
obtain a commitment from a bank. You will have some kind
of an unused fee that you pay the bank on an ongoing
basis, or bank or financial entity. And then if you
actually draw the money down, then you start to pay a
spread, which is typically based off of LIBOR. And that
spread ranges between 60 and 80 basis points from the
quotes that we were able to obtain. So that just means that a line of credit ends
up being a more expensive, albeit simpler, access
to borrowing. If you borrow through the securities
lending or the synthetic markets, that takes an ongoing
management process. And you're exposed to an indeterminate term for
the loan. So the loan may or may not be able to be rolled
over, and an indeterminate potential that you might have
to adjust, either the collateral or that you're going to
basically have to use part of the proceeds that you
received in that form of borrowing to actually be able to
pay for market volatility in the underlying asset.
So if you raise $5 billion out of security lending or out of synthetic equity, you cannot
use that $5 billion in its entirety to go out and do something
else with that money. You really have to reserve
capital back. In the case of equity exposure, we would
typically reserve approximately 20 percent of whatever has
been raised as a buffer to be able to make mark to markets
on the equity derivatives as they come due. And I think, you know, we could blather on
about this all day, but at this point, I would ask
if you have questions about the item. And again, our objective
is to understand where you, as a Board, really want
to position the liquidity allocation as we try to work
through all that material and bring that back after the
beginning of next year for an actual approval of a policy
portfolio. CHAIRPERSON JONES: Okay. Mr. Jelincic.
COMMITTEE MEMBER JELINCIC: I was a little surprised at the line pricing. I would have
expected it to be higher, because if I'm a bank pricing it, I know
CalPERS is going to draw it only in the worst possible
time. So that surprised me, but you also raised --
apparently, there's some legal issues about whether we
actually could, in fact, enter into a line of credit, and
can you at least touch on what those legal issues are?
SENIOR INVESTMENT OFFICER BAGGESEN: Sure, Mr.
Jelincic. That's actually a really good question. The
real issues attached to this are our policies relating to
both securities lending and, for example, the equity
portfolio, and the policies in particular as they link
back to leverage. So right now, our securities lending policies
do not anticipate that we would receive a block
of collateral for lending out a portion of our equity portfolio,
let's say, and then reroute that collateral into
some other purpose.
Instead, the policies basically consider that the
collateral raised in securities lending would drop into
the collateral pool and it would be managed with a certain
liquidity profile. So I think we would want to be very
careful to make sure, if we were going to use securities
lending as an alternate source of liquidity for some other
purpose, that we then would make our policy documents
actually reflect that, and we would be aware of the potential implications for leverage
that engender from that activity.
And the same exact thing happens within the synthetic equity portfolio. Right now, we
are constrained to running a synthetic equity strategy. I
think our constraint on this is about 10 percent of
the overall asset class exposure, with a significant -- already
a synthetic equity portfolio in place. So to
the extent that we turned around and again borrowed money
through that mechanism and routed it off to some other
purpose, we might potentially want to follow with some
leverage limits. So we would just have to make sure
all of the policy language really meets that purpose.
The last comment I would make in relation to that
though, is that these policies are self-imposed CalPERS
policies. So if a circumstance came up that we suddenly
needed to raise capital for some reason, we could bring
that back to this Board for a decision to basically allow
a violation of the existing policy. That's your judgment
as Board members. But in the case of some kind of a real emergency
or whatever that would cause this kind of a need to be
utilized, I would suggest that's also a mechanism that can
accommodate that kind of activity. COMMITTEE MEMBER JELINCIC: But my question
actually was intended to focus on the line of credit.
What it says here, among other things, is further research
would be necessary to confirm CalPERS ability to enter
into such a line. And then there was another reference to
some apparent legal constraints. And was I just
wondering -- SENIOR INVESTMENT OFFICER BAGGESEN: There's
been some initial exploration done by the compliance
area within the Investment Office. And I -- Warren,
do you have a comment?
ASSISTANT CHIEF COUNSEL ASTLEFORD: Sure. Mr. Jelincic. Warren Astleford, CalPERS legal.
There might be an issue with respect to debt limitations,
meaning that when the State of California, for example,
incurs debt, it needs to get approval by the legislature or
by a vote of the people.
It's a little unclear as to whether or not CalPERS incurring debt like that would be
subject to those sorts of same limitations, so some additional
research would be required in that regard.
COMMITTEE MEMBER JELINCIC: Okay. Thank you. CHAIRPERSON JONES: Mr. McGuire.
ACTING COMMITTEE MEMBER McGUIRE: Thank you, Mr.
Chair. Eric, I appreciate this product. It's very
informative, and your comments going through it here today are also very helpful. I agree
with probably 98 percent of the information you presented. I think
relative to asset sale, I think I've mentioned to you
that we didn't -- I don't think that the item recognized
the opportunity costs associated with any asset
sale, whether it's fixed income or equity.
Secondly, I think if we, for -- if we had a
liquidity need and we were going to do an asset sale, I
think we would go to fixed income and look at short to
short-intermediate treasuries and agencies, and not go
beyond that, because basically the opportunity cost is
possibly the lowest right there, and that's probably what
we'd look at. But I really see asset sales as sort of a
secondary option. The borrowing options are the primary
ones that I think that you analyzed and I think that this
Board needs to consider further. I agree with you totally
that the securities lending and synthetic equity are the
lower cost options, no question. What I'm a little
concerned about is I don't think we've had enough
discussion or information presented by staff relative to
the actual issues related to those options providing
liquidity, the constraints and impediments thereto.
And also, I'm not quite sure you addressed using
those two options in a stress environment. It seems like it's possibly more of a normal
environment, and ultimately I'd like to hear some comments on those two
options in a stress environment.
I think the only problems related to a line of
credit in a stress environment is do you already have it
established, and is it with a financial institution that's
going to survive? (Laughter.)
SENIOR INVESTMENT OFFICER BAGGESEN: Exactly. ACTING COMMITTEE MEMBER McGUIRE: Frankly,
I don't think that this institution if it was
going to enter into a line of credit would do it with AAA
bank down the street. And I think, as a AAA credit itself,
we would have no problems at achieving the attractive
terms that you indicated in this item. It didn't really
surprise me, even though it was a little bit lower than
the indicative rates that I mentioned at the workshop, because
it was basically a CalPERS staff person looking for
that information.
Anyway, I think that this is illustrated how important liquidity is. And I don't think
that we've adequately -- the reason I'm focused on this
is because I think for three years, since 2010, four percent
was too much liquidity, given the actions that staff
and this Board had taken since the crisis to actually
improve the liquidity position and the risk -- some of the risks
associated with the programs that we're involved in.
So I thought four percent was too high. I was
grad to see staff recommend a two percent, which is lower.
But every one percent represents potentially $150 million
a year of lost opportunity relative to another -- if it
was spread across the entire fund. So I think this liquidity issue is very
important. You said you'd be looking for some form of
direction from this Board. I voted for one percent the
last time we were at the workshop. I think everybody
thought I was the person who said zero percent, but I
decided, what the heck, I'll just go one percent. The information you provided us hasn't really
changed my opinion. I think one percent needs to be
seriously considered by this Board relative to the
liquidity policy target. Now, a liquidity facility, actually considering
that, I think it should also be investigated further,
because if you look at what the upfront costs are, which
you indicated three to 10 basis points, which if you
spread it over a three to five year facility, plus add
that to the unused fee, that insurance policy or that
facility that's there in case there's an opportunity investment, is only, if it's not drawn, somewhere
between four and 13 or 14 basis points annually. That's pretty
dang cheap insurance. And it should likely be available
in times of stress, assuming that you get more -- have
more than two or three banks providing separate facilities, and you stagger the terms of those
facilities. So I think I would recommend guidance by this
Board that staff look at a one percent liquidity, but I'm
not sure where -- I think -- the item says that the staff
will come back with a recommendation at the February
meeting, but you'd like to see some guidance. There's the
guidance that I would recommend. Thank you.
CHAIRPERSON JONES: Before I call on Mrs. Mathur, there are several issues that have surfaced
since we had our last workshop, so we're looking at the
possibility of having some scenarios at the off-site. So
we will follow up on that and perhaps that's an opportunity
to deal with it at that time, Mr. McGuire.
Mrs. Mathur. COMMITTEE MEMBER MATHUR: Thank you, Mr. Chair.
I appreciate Mr. McGuire's comments. And I do recognize
that having a significant allocation to cash is a drag on
the portfolio. We all know that that's true. But we also
know that in times of stress, we cannot fully anticipate
how markets are going to behave. So I guess -- I can see that four percent is too
high of an allocation to cash. I still feel comfortable
with staff's recommendation at two percent. I think
that's the right place to be, and we can continue to, you
know, further analyze it, and, you know, next time we have
our asset allocation, we can take another look at it, but
I personally am comfortable at two percent. CHAIRPERSON JONES: Dr. Diehr.
VICE CHAIRPERSON DIEHR: I agree with Mr. McGuire, including probably that a one percent
appears to be adequate, assuming that we have a line
of credit. I don't think we should consider the three borrowing
methods as mutually exclusive. We have the line of
credit available, and then we have a need for cash
and you figure out what the best deal is and exercise that
one. But I it's a -- as he points out, it's a low cost
insurance policy.
And I suspect that if we got into a situation where, I mean, banks were failing, it wouldn't
honor the line of credit. That would probably be a minor
problem that we would have, compared to everything
else. So I think the one percent cash, because of the
opportunity costs of holding cash, is all we should maintain.
CHAIRPERSON JONES: Okay. So as you can see, there's a difference of opinion. That's why
I say we need to come back in January and put this little baby to bed.
All right. No further questions? Okay. Thank you for the report. Michael, did
you have any comments you wanted to make on this issue?
MR. SCHLACHTER: The only comment I would make I
think is -- Michael Schlachter, Wilshire Associates -- is
just the level of cash as an asset allocation decision, I
think is different than most of the other asset allocation
decisions that you make. So your level -- whether you
have 10 or 12 or 14 percent in private equity, I think is
your comfort level with the overall risk profile of the
fund, and how much to invest in that asset class from a
return perspective. In this case, as Ms. Mathur said, there is
really no desire to have any cash at all if you could
in an ideal world. So the question becomes how much cash
should you have as a static allocation for frictional
purposes. So to the extent that the CFO and the risk management
staff can tell you, look, our average cash balance
needs to be $2 billion at a given time, or whatever that
number is, that I think really should drive the ultimate
decision. It shouldn't be simply our gut feel as to
whether zero, one, two, or three is the best number, but
rather operationally, in a normal environment of
course -- these are all the stress scenarios -- in a normal
environment, what operationally does the CFO's office need to manage
CalPERS successfully? And the rest, I think, is obviously -- the
other asset classes are determined by kind of your
needs and wants and desires for return and risk, but
cash really is a functional question, in my opinion.
CHAIRPERSON JONES: Thank you. Okay. Thank you
very much. We now move to public comments. We have one
request to speak. Mark McGlade. And would you identify yourself and you have
three minutes. MR. McGLADE: There we go. Thank you. Thank
you all for taking the time, at the end of what
I'm sure is a very long day for you. My name is Mark McGlade.
I'm with Patriot Financial, which is a California DVBE
firm as well as a service disabled veteran owned business
on the federal level.
We are, what would probably best termed, as an
emerging financial services firm. Over the course of my
career, CalPERS has established a well-earned reputation
for being very innovative and forward thinking in issues
that affect the capital markets. One of those is
certainly disabled veteran business enterprise. Owe the holidays, there's going to be a movie
coming out called "Lone Survivor", which is about a Navy
Seal operation in Afghanistan that ended very badly. I
was recently honored to be invited to a benefit for the
families of the Seals who lost their lives that day. In
attendance were all the families, wives, mothers, children, as well as the Seals who did make
it home, and the rest of those teams.
In talking to them, it really underscored the
importance of programs like the DVBE. Many of these men
and women with five, 10, 15 years of service have little
idea of what they're going to do after their military
careers end. Firms like ours, with the DVBE as a
catalyst, are able to really make a difference in these
lives and offer meaningful opportunities and create jobs
here in California. So I wanted to give you a peak behind the
charts in the graphs that you see all day, and give
you some feedback on some of these programs that CalPERS
has established. And I think you're going to see
the rest of the nation falling in behind that. And I think
it's important. I think the work you do here really
impacts lives. And you probably don't often hear that.
So I wanted to thank Mr. Dear specifically and
the members of the Committee for all that you do.
Thank you. CHAIRPERSON JONES: Thank you very much.
And we do have a very robust DVBE program, right?
So perhaps that could be shared with Mr. McGlade. Okay. Thank you very much. Okay. That
concludes the open session, so we will now move to closed
session as soon as we can clear the auditorium.