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CHAIRPERSON JONES: Okay. Next up on the agenda is the
Infrastructure and Forestland Program Annual Review.
(Thereupon an overhead presentation was presented as follows.)
SENIOR INVESTMENT OFFICER ELIOPOULOS: Good afternoon, Mr. Chair. And scheduling question
for the Chair. Andrew Junkin from Wilshire has a plane
to catch, so we thought maybe we could just hear his
very brief report on forestland, if that's okay with
the Chair and accommodate --
CHAIRPERSON JONES: Sure, that's fine. SENIOR INVESTMENT OFFICER ELIOPOULOS: Okay.
And then we'll move to infrastructure and forestland
CHAIRPERSON JONES: Okay. Thanks. SENIOR INVESTMENT OFFICER ELIOPOULOS: Okay.
Great. So with that we can go back to our regularly
scheduled process. We'll just make sure to give him time
during the course of the discussion to get to forestland.
CHAIRPERSON JONES: Okay. SENIOR INVESTMENT OFFICER ELIOPOULOS: So with
that, you've heard plenty from me today on the real assets
side. Randall Mullan will go through a very similar
discussion of infrastructure and forestland. Randall.
SENIOR PORTFOLIO MANAGER MULLAN: Thank you, Ted.
Good afternoon. Randy Mullan, Senior Portfolio Manager,
Real Assets. My comments today I was going to do in three
parts. I was going to take the Investment Beliefs for
both of the programs and then talk about infrastructure and forestland. But we'll take them in a different
order. And I'll start with my comments on forestland.
So just to my left here I have with me Farhad Billimoria who is a Portfolio Manager in our
infrastructure and forestland group. Farhad has been with
us a little over a year now, about a year and a half. And
he splits his duties between infrastructure and
forestland. And then we have Andrew Junkin from Wilshire
as well, who is the Board's consultant for the forestland
program. So just at a high level, the program has a
market value of about 2.2 billion, which is roughly
0.8 percent of the total fund, and very close to its one
percent allocation target. It holds interests in two
investment vehicles, one U.S. and one international.
The U.S. investment vehicle is about 75 -- or 78 percent
of the portfolio value and that vehicle is heavily
concentrated in the U.S. south. There were two largest
investments made back in 2007 and 2008. And those comprise
the portfolio.
So the U.S. south investment is really quite reliant on the housing market in that southern
area. And that market has been very soft for a number
of years. It started to rebound probably within the last
year, but still pretty soft. So our exposure there has
been -- we'll, I'd say it's generated disappointing results for several
years now. I think a bit of a better result in the
last year I think we -- our recent one-year number has
greatly improved for the portfolio. I think overall
we hit a net six and a half percent return, so it's nice
to see the numbers turning positive.
Our focus through 2012 and '13 was really on
asset management of the existing investments. We were not
really positioned to consider new opportunities. Although
we did renegotiate our separate account for our
international portfolio. Last spring we assigned responsibility for
the forestland portfolio to Farhad. And Farhad
then promptly implemented a review of status of the program
and near-term options for managing the program.
And he did that work with some assistance from Meketa
Investment Group. In June, we -- Farhad and I took the
findings from that review to our Investment Strategy Group,
which is our -- I think you know, but it's our internal
senior executives group, where it was concluded that
for the near term the focus should continue to be on stabilizing
the existing portfolio, and not look to expand
significantly or reduce our investment.
It was also suggested that we consider opportunities for diversifying the portfolio. So, you
know, on occasion there are opportunities that pop up in
other areas of the U.S. market and we should consider
those opportunities. ISG also directed us to, over the longer term,
work with CalPERS asset allocation team and review the
strategic role and fit for this program within the total
fund. And the idea is that we would do that work in
conjunction with the factor based allocation work that's
going on. And I think it -- that that work will be a
little bit more mature in 2014. I think it would be a
good time for us to take this program and work with the
asset allocation team to reassess it. So that is really
the plan. I think we'll do the review work with the
asset allocation group. And the plan is that we
would be back to you with our findings from that review
late next year. So this time next year.
CHAIRPERSON JONES: Mr. Junkin, did you have any
prepared comments you wanted to make or are you just here
for questions? MR. JUNKIN: As much as anything, I think I'm
here for questions. I mean, I made some comments earlier
in the performance report about the status of the program.
It's contained in our letter. You know, it's just not an easy program to fiddle with, frankly.
CHAIRPERSON JONES: Thank you. Mr. Jelincic.
COMMITTEE MEMBER JELINCIC: You had a discussion about this program. And I just have a great
deal of difficulty understanding how you get a timber
program without exposure to northeast and the northwest.
The -- and, you know, I understand that we can blame
this one on Russell Read, but it's -- he's been gone for
a while. And why have we not looked at expanding into those
areas? And, in some ways, forestland is analogous
to infrastructure. If the market is down, you
just don't cut any trees and it grows at five percent.
And then when the market comes back, you cut it
down and you harvest it. So since it's got a -- you know,
even when the market is down, trees tend to grow, so why
have we not looked at expanding into the northeast and
northwest? Is the -- you know, right now it's fully
allocated. Should we make the allocation bigger or at
least create some flexibility? And if it's going to grow
at five percent, why not do it? SENIOR PORTFOLIO MANAGER MULLAN: Yeah. I think
the answer is probably that after acquiring those large
portfolios in the, you know, 07/08 that we were fully or
overallocated. And soon after we'd acquired them, I think we were having a bad experience
with that portfolio. So I don't think there was a huge appetite to sort
of dive in and get more.
The last few years, the program's been managed kind of on a shoestring. There was -- I think
we had one investment officer looking after the program
for a couple years. And then when I was moved into Ted's
group, Ted assigned me with -- assigned the program to
me. We had one resource working on it part time, and
that continues to be the case.
I think now we're sort of better positioned. What we're trying to do is really integrate
forestland more with the infrastructure program. And
so Farhad, who works -- you know, for example, works on both
programs, we are able to tap into other resources within
the team. The processes that we would use to monitor and
evaluate -- monitor existing investments and evaluate
new opportunities are going to be the same for
both programs. So I think we're becoming better equipped
to move on new opportunities. There are some things
that we are actually looking at now that may help us,
in terms of diversifying the portfolio.
COMMITTEE MEMBER JELINCIC: And I understand it's
lumpy. You can't buy a tree, and so it's got fairly
significant commitments at a time, but I really -- well, I think we need to look at getting
into the northeast and northwest somehow.
Thank you. SENIOR PORTFOLIO MANAGER MULLAN: Yeah. And
I think that's right. I think we all agree that
diversifying is important for this program. And Andrew
certainly concurs with that. He's raised the point in his
letter. CHAIRPERSON JONES: Thank you.
Mr. Slaton. COMMITTEE MEMBER SLATON: Thank you, Mr. Chair.
I just want to build on some of the reporting that Anne
Simpson gave. While trees may grow at five percent a
year, this is not without risk, this type of portfolio.
Particularly in the northwest, due to climate change and
other factors with drought, you've got the pine bark
beetle infestations, which means that when you have fire
risk, you have larger fires, more intense fires. So even
a forestland project is not without significant risk. So
I think we should tread carefully. Thank you.
CHAIRPERSON JONES: Okay. Seeing no further questions on forestland, we now move to infrastructure.
Thank you. SENIOR PORTFOLIO MANAGER MULLAN: Okay. Thank
you, Mr. Chair. The way I'd like to do this is to start
with commentary on the Investment Beliefs, and then I'll
move to more specific comments on the forestland program.
I'm just looking for David. You want to come up.
So I don't intend to go through all the details of the materials, but I'd be glad to address
any questions that the Committee might have.
So let's begin with the Investment Beliefs. SENIOR PORTFOLIO MANAGER MULLAN: And it starts
on slide six. So we've outlined for you, beginning on
page six, staff's thoughts regarding how the two programs
reflect or demonstrate CalPERS beliefs. In general, I'd
say that staff sees the beliefs as a valuable guide for
planning and execution. And we consider their adoption by
the Committee to be timely for our programs, as we're
looking to expand investment for the infrastructure program, and as we are about to review the
role and strategy for the forestland program.
So just looking at Investment Belief number one,
liabilities must influence the asset structure. We see a
clear match between the System's liabilities and the
strategic objectives of the programs. The program's roles
specify investment attributes that are important for
meeting the System's long-term liabilities, specifically cash yield, capital preservation,
and inflation protection.
I think the infrastructure program is a particularly good match as it can generate
stable long-term cash flows that can immunize the
long-term pension payment obligations of the fund.
Investment belief number two, long-term investment horizon. So we believe that the
programs provide an avenue for CalPERS to participate
in long-term investments. And certainly the investments
of these programs encompass long life assets that are
naturally suited to long-term holdings.
Because we underwrite these investments as long-term holdings, we understand the importance
of assessing risks and returns over the long
term. For example, in the infrastructure program,
what is central to our investment reviews is our
assessments of long-term reliability of regulatory regimes,
and key contracts. For the forestland program, I think
a long-term perspective is essential when you've
got assets that grow and mature over decades. Here, you've
got the opportunity to time your harvest to take best
advantage of the market. And with timber properties, you
have to manage them sustainably in order to preserve
their values. Investment belief number four, long-term value
creation requires effective management of the three forms
of capital financial, physical, and human capital. I
would say that it's largely because of the long-term
approach for infrastructure and forestland investments
that we recognize the importance of sustainability factors.
I'd also say that because we rely on external managers and other investment partners, we
know that successful long-term investment requires successful
long-term relationships. Therefore, we understand that
it's vitally important to select appropriate managers and
partners and establish sound governing agreements. We
address this through conducting extensive due diligence,
extensive analysis in assessing our managers and our
partners, and through utilizing structures that give us
substantial control or influence over our investments.
I'd also add that we endeavor to implement best
practices with respect to sustainability factors with our
due diligence and our monitoring and our investment management. These are very important points
that are highlighted in the roadmap for our group,
as well as the staff's performance plans.
We have a staff person in our group that has taken the lead on the cross asset class project
to integrate Investment Beliefs into the programs,
and also to -- she's working with the global peer review looking at
expectation -- manager expectations. SENIOR PORTFOLIO MANAGER MULLAN: So over to
Investment Beliefs. Actually, Investment Belief Seven and
Nine both pertain to risk, so I'll talk those together.
And I would interpret them together as saying we must have
appropriate measures and rewards for risk. So our approach is to undertake thorough due
diligence to identify and gauge key value drivers and
risks, including sustainability factors. And we quantify
the risks using our financial analysis that incorporates
sensitivity analyses, and downside return scenarios. We
also strive to be disciplined with respect to our return
requirements by calibrating our required returns with
risks. Investment Belief number Eight, costs matter.
We achieve cost effectiveness mainly by negotiating
lower costs managed investment vehicles. We always
come at this from the perspective of value for money. So
our prospects must meet our quality standards. So I'd say
overall, our view is that the program is very well -- programs
are very well matched with the Investment Beliefs.
We're pleased that the Board has adopted these beliefs.
We see them as reaffirming our strategic objectives for the
programs, as well as reinforcing our approach to implementing the
programs. So with that, I'll move over to -- specifically
to the infrastructure program. SENIOR PORTFOLIO MANAGER MULLAN: So, Mr. Chair
and members, we've observed, through the asset liability
management process, that infrastructure investment has
desirable attributes for the funds -- that meet the fund's
risk return goals. Our takeaway from the ALM discussions
is that you're keen to see the fund significantly expand
its investment in this area. So Ted and I and my staff
appreciate that you see an important role for the
infrastructure program in the total fund. We clearly
recognize that meaningfully satisfying this role requires
that the program become a much bigger program. I can assure you that staff is very focused
on expanding the investment under the program.
In 2012-13, we added almost a billion dollars of new commitments
for the program. We aim to increase this pace
going forward. And to this end, we've strengthened our capabilities
in a number of areas. Firstly, we recruited several
new staff within the past year. The team has almost
doubled in size within the past year.
We've done some good work at improving our manager evaluation processes, standardizing
those processes. And I think, quite importantly,
we've developed and implemented a new separate account
structure, which we see as a model that we can roll-out
for multiple new managed investment vehicles. So I think the present market environment
we've talked about a little bit, you know, through
the real estate presentation, low-yield environments
where investors are in search of better yielding
alternatives. You know, so we've seen money coming into
the infrastructure space, and obviously higher
pricing for infrastructure assets. To us, it feels like
the entire opportunity set is more expansive, certainly
from an absolute value perspective.
But I guess the question is what are we going to
do about it? It's the same situation facing everyone.
It's probably pervasive across the private asset classes.
In this environment, our approach is really to pick our
spots. We want to compete in areas where we feel we're
most competitive. So, for us, that's really the domestic
market. Secondly, we want to position ourselves with
the best possible partners and managers, and that
way we are -- we'll be confident that we have deep
insights into the assets that we are looking to underwrite,
and that we'll be confident that we have strong capabilities as
asset owners, if we ultimately acquire the assets.
So I think we believe we have a sound approach. We've got, you know, a pretty strong team
now. We believe we're making positive steps toward effectively
increasing investment under the program.
SENIOR PORTFOLIO MANAGER MULLAN: I had just a
few comments on the remainder of the slides. And I think
what I'll do is I'll move to slide 9. So slide 9 provides
our high level numbers as of March 31, 2013. At that
point, we had a net asset value of 1.1 billion, 0.4
percent of the total fund NAV. I think today we're closer
to 1.4 billion. As you can see, the graphics show that we've
had some steady growth to the program. And the
green section in the middle of the page points to our investment
results, which overall are quite strong. On a
time-weighted return basis, we've been outperforming the
benchmark for all periods. And in addition, if you look
at it on an IRR basis, we're now running at an IRR of 14.3
percent. SENIOR PORTFOLIO MANAGER MULLAN: Okay. So
I think I'm going to fly ahead to 14. Actually,
we noted on page 11 of the deck that we have no areas of noncompliance
with the policy. Here on slide 14, we noted that we do
wish to address some policy aspects. There are some areas
which we feel impede investment for the program. In
particular, we recommend modifications to the limits on
permitted leverage, so that the program can more readily
pursue investments that are suitable for the program.
And we'll come back to this. I think it's the
next item on the agenda. That's just a heads up.
SENIOR PORTFOLIO MANAGER MULLAN: And now I'm going to skip all the way to slide 22. This
just shows our review activity last year. I think -- I'd
say we had a reasonably healthy flow of opportunities
in 2012-13. It shows here that we took seven opportunities
into advanced stage due diligence, so $2.6 billion of opportunities.
We ultimately closed on 932 million of new commitments.
And I think those are mentioned. Those specific
commitments were mentioned back on slide 11.
-o0o-- SENIOR PORTFOLIO MANAGER MULLAN: Investment
in California, page 23. So investment in California
continues to be a program priority for us. And we've been
active in a number of sales processes throughout the past
year. We've submitted bids on over a billion -- sorry. We've submitted bids on over a billion
dollars of opportunities within the last 15 months. Unfortunately,
we haven't closed any of these yet. We've been outbid on
some of them. Some of the processes have failed to
materialize and there are others that we are still working
on. So we're still working very *** the California
front, still reaching out to various players in the --
within the state. SENIOR PORTFOLIO MANAGER MULLAN: So that really
concludes my comments on the infrastructure program
segment. I guess I would just close by repeating that I
think the program objectives are well matched to the
fund's risk return goals. We believe that our approach
has very strong alignment with the Investment Beliefs.
Our investment returns are strong. The team is getting
stronger, and I think that the team is very focused on
expanding investment under the program. So with that, I'd be glad to take any questions
on the infrastructure segment. CHAIRPERSON JONES: Okay. Yes, we have a few
questions. Mr. Jelincic.
COMMITTEE MEMBER JELINCIC: One, I want to commend you on your discipline. I know you're
under a lot of pressure to get money out, but I encourage you to so in
a disciplined manner. When we adopted this program, the expectation
was that the largest risk classification was going
to be defensive. And as of the slides, you know,
18 percent were defensive, and 55 percent were defensive
plus. I realize that none of the limits apply until
you get to three and you're not there yet. But what do
you intend to do to move that, you know, to more where the
original targets had been?
SENIOR PORTFOLIO MANAGER MULLAN: Yeah. Well, so
since March 31, we have closed on one investment that will
increase our defensive exposure up to, I think, 30
percent. So we closed on the interest in the Astoria
Energy Plant. That's the power plant in New York City
that we spoke with you about I think it was probably back
in April or May of this year. So that's the first step. That's definitely
the highest priority area for us amongst the risk
classes in our program. So I think one of the challenges
of getting there is that you have to be pretty competitive.
And we see a lot of players chasing after -- it's
much like the real estate story. You see a lot of competition
in the core assets. We see a lot of appetite for
the sort of high quality defensive assets. And I think
the competition there is really the direct investors. So the
other big pension plans from Canada and elsewhere, sovereign wealth funds and more and more we're
starting to see the insurance companies coming in.
So for us, we just -- we have to pursue those in
a cost competitive manner. And I think that's a
combination -- probably it's a combination of two things.
One, through our new custom account arrangements, I think
we have a pretty cost effective model that we think we'll
be able to roll-out more broadly. You know there are fees in there, but it's
a lower cast model. We have much more in-house
discretion in that model than in some of the other outsourced
or discretionary models.
And then I think we want to complement that with
our I guess I'd call it direct -- direct capabilities or
direct style investing. So if it's in the domestic market
and it's a defensive asset, that's something we would
think about pursuing directly, if we have the right
partners around us. And so the partners might be exactly
those ones that I mentioned as competitors. But this is
the area that we are very focused on and very keen to get
invested in. COMMITTEE MEMBER JELINCIC: And again, I commend
your discipline, even though it can be a little frustrating at times.
Thank you. CHAIRPERSON JONES: Mr. Lind.
COMMITTEE MEMBER LIND: Thank you. I just had a
quick question of this whole issue of the obstacles to
expanding, and the discipline that J.J. talked about.
Just a question on the slide that just disappeared on my
screen here, number -- anyway, the issue was new
opportunities reviewed. The infrastructure program
reviewed 129 new opportunities and closed on three
investments. That just seems like a striking ratio to me.
Is that normal? I mean, do we normally have to go through
that many different opportunities to find three?
SENIOR PORTFOLIO MANAGER MULLAN: Well, to me, it
feels about right. (Laughter.)
SENIOR PORTFOLIO MANAGER MULLAN: It's normal from what I've seen in past experiences, both
-- well, here and in other institutions where I've
been. Yeah, I don't know what else to add to that. These
are -- the 129 is the actual number that we get through our
IPTS system. I don't know if you're familiar with that,
but everything that comes in that kind of a real sort of
offering or opportunity, it goes into our IPTS system
and gets counted there. So, you know, there's probably a lot
of stuff that just doesn't quite -- you know, doesn't
even fit for us, and then there's stuff that's a better
fit, but you know maybe not quite there.
COMMITTEE MEMBER LIND: Okay. So this is -- these reviews include somebody looks at a
report? These aren't all big due diligence going out and
visiting somebody?
SENIOR PORTFOLIO MANAGER MULLAN: No, they're not. No, but all of these opportunities get
picked up in IPTS, and they all come to our weekly meetings.
And we go through every single opportunity. And some
of them, you know, honestly take, you know, 20 seconds.
Other ones obviously take longer, but we go through everything.
COMMITTEE MEMBER LIND: All right. That clears it up for me. Thanks.
CHAIRPERSON JONES: Mr. Slaton. COMMITTEE MEMBER SLATON: Thank you, Mr. Chair.
You know, when I was in junior high school a
bunch of us in our neighborhood all had go karts, but a
couple of people -- a couple of the kids figured out how
to take the governors off the engines, and so there was
less control. And invariably, they had accidents. So I
appreciate the level of control that you're doing. Don't
take the governor off. And I also looked, like Mr. Lind did, the 129 and
realized that we have a system now that allows anyone to
submit to CalPERS an investment idea or strategy. So
that's a very wide net and you obviously get a lot of
things that are of no particular value from an investment
standpoint. But what struck me about that chart is the
seven that you did in due diligence and arrived
at three closed commitments. To me, that's discipline of not
wasting time working on things that don't have merit.
So I want to compliment you on at least that statistic I see tells me that you're being
careful in the use of your resources to make this work. So
I know you're under pressure to increase the number of investments,
but we'll hopefully make them all good ones.
SENIOR PORTFOLIO MANAGER MULLAN: I appreciate the comments, Mr. Slaton. I think my comments
with respect to the team are that we've got the
right sort of mindset within the team. It's a very risk
minded group. I think a lot of them have sort of a credit
background to them, so they come at it with a very risk-minded
approach. And I just had a point on the control issue.
I think for us it's been important to have more
control, rather than less, more in-house discretion
maybe than some of the other programs here, real estate or
others, because infrastructure is a -- still a fairly new institutional
area, and it's not really uniform like some of the other
asset classes, so a little bit undefined. And I think the early days we witnessed a
lot of managers sort of investing in all sorts of
stuff that I'm not really sure we would call infrastructure.
In fact, I know we wouldn't call it infrastructure for
our purposes. And we have some of that in our portfolio.
And there were a lot of mishaps and not a lot of great track
records that came out of that first wave.
So I think for us with having gone through the
whole sort of asset allocation process and being very
focused on the role for this program, we felt that it's
real important that we have more control on this thing.
And so, you know, we're using those kind of structures
that give us that. SENIOR INVESTMENT OFFICER ELIOPOULOS: Underscore
that for their approach. And it is different than in real
estate where we're able to define very clearly the
investment guidelines as we discussed for an office
bidding otherwise. But the other reason to do it in
infrastructure is it's such a small portfolio. Every new
addition is so impactful to their portfolio, that having
that level of control is needed. They're doing a terrific
job starting this team up. CHAIRPERSON JONES: Okay. Well, thank you for
the presentation. We'll move to the next item on the
agenda, the consultant reviews of the infrastructure, because we've already done -- completed forestland.
So Meketa Investment Group. MR. ALTSHULER: Hi. Good afternoon. David
Altshuler, Meketa Investment Group. We submitted a
program review along with the materials, so I don't have
formal presentation for today. I was just going to
highlight a few points from the program, some of them.
Echo those made by Randall. I wanted to start with performance, performance
for the program for the reporting period which is 3-31. A
lot of the comments and activities occurred post-reporting
period. But for that period, performance was positive. I
think it's important to note that performance was still
very much impacted by earlier fund investments made prior
to the team, current team. And so I think that has
affected primarily the risk profile of the program, which
as was noted had been underweight defensive. In the course of the year since we were before
you presenting on last year's program, the exposure to
defensive lower risk investments did increase from 0 to 18
percent. As was indicated in the post-reporting period,
new investments have increased that allocation to about 30 percent.
So I think that what you're saying is a trend along the lines of where the strategic plan
for the program had pointed moving more towards a
defensive allocation. I think it's also worth noting
that the direct investments, which are really a focus
of the program, materially outperformed the fund
investments. And that's also consistent with the strategic
plan. Pacing has been an issue. It's been an issue
as we heard also for real estate, primarily because
both are focused on core. Core is -- I won't go into
the conversations that have already occurred.
I think though we would like to highlight that first separate
account that was negotiated by staff I think really
is a positive development. We saw a lot work go into that.
We see it's an opportunity to share resources with a manager
that will create efficiencies for the program in terms
of getting invested. As Randall said, they can focus
on areas where they really have competency, a competitive
advantage. And that we think the amount of resources that
goes into conducting due diligence on a direct investment
and the timing is intense. And for any program like
this, it's really important to be able to have good partners.
And so we think the focus on asset selection by
staff, which staff retains control over, and ability to negotiate terms that are favorable
and realize cost savings is really a win, win, win. And we
think it will also increase the pacing of the activity.
I wanted to just briefly touch on the outreach effort, which many of you were involved in.
From our perspective, sort of participating in it but
also talking to some of the other participants as well
as just hearing the responses to it from the industry, it
was really favorable. We think that it put CalPERS really
in a position of leadership, in terms of looking
at in-state investment.
It was a chance for the broader community to get
to know CalPERS as an investment team, and the staff and
the objectives. And it got staff sort of more engaged
with some of the different stakeholders. And we just know
like from -- there's been a lot of activity since then
with the Targeted Investment Program and staff with
conferences. And I think there's just -- it's just --
it's been a very positive process. And even though it
hasn't translated into any direct new investment activity,
there's -- a lot of groundwork was laid. And finally just I think to this issue of
the Investment Beliefs, it was, I think, articulated
very well that a lot of the fundamentals of the program
really are
aligned with those beliefs as it is a long-term investment program. It is focused on cash
yield. And I think increasingly the -- there's a recognition
of with infrastructure the way -- the importance of
integrating ESG into the analysis. Infrastructure, by
virtue of being large assets in the public that touch a lot
of people, and affect resources I think makes it particularly
sensitive to these issues.
And I think it's -- it's a priority for the program, and I think it will be a great model
for looking at how ESG factors get integrated into the
investment process. So if there are any questions, I'm
happy to answer them.
CHAIRPERSON JONES: Okay. Well, I see no further questions, so thank you very much for the
report on infrastructure.
We now will move to the next item on the agenda Proposed Revisions of the Real Assets Program
Policy initial review.
Mr. Eliopoulos. SENIOR PORTFOLIO MANAGER MULLAN: Ted is handing
it over to me. Randall Mullan, Senior Portfolio Manager,
Real Assets. So this item outlines staff's proposed
modifications to the infrastructure attachment of the real
assets policy. And the notable changes are outlined in the analysis section of the agenda
item memo. As described in the memo, there are a number
of changes. One, we've proposed changes to improve
clarity of certain defined terms in the policy.
Two, we've proposed changes to fill what we perceive to be gaps in the policy with respect
to single investment vehicle concentration and single
manager concentration.
And thirdly, most importantly from our perspective, we've proposed modifications
to the leverage provisions of the policy. And those include
firstly removal of specific limits on leverage in
commingled funds. And this is to allow management flexibility
to pursue funds that target lower risk segments
of the market.
Secondly, with respect to leverage, we propose to
increase the threshold above which IC approval would be
required for new direct equity investments where the
leverage is not investment grade. So we're really looking for flexibility to
transact investments which we think are very suitable for
the fund. Thirdly, on the leverage, we're also
recommending eliminating the credit rating requirements
with respect to new debt investments. And this will, we
believe, will enable us to acquire suitable forms of debt securities that are not ordinarily
rated. Debt securities found in the bank market or, you know, structured
securities that typically aren't rated. So I think the idea really is to give staff
more flexibility to invest in suitable assets without
necessarily having -- coming back to the Committee first
for approval. So with that, I'll just take any comments
that the Committee has.
CHAIRPERSON JONES: Mr. Jelincic. COMMITTEE MEMBER JELINCIC: If you really wanted
to create clarity, you'll start using core, value-add, and
opportunistic. But I've lost that argument, but that
would make more clarity. But as a fundamental question, we are talking
about de-risking the portfolio. And yet, here's a
proposal asking us to increase the risk of in the
portfolio. And so I'm wondering how those two fit
together? And the other issue is I understand that the
problem is actually in the defensive, which we would like
more of. And so my question is why are you proposing to
raise the leverage on the whole portfolio rather
than raise the amount of leverage available on this
specific part of the portfolio that you're trying to address?
SENIOR PORTFOLIO MANAGER MULLAN: Okay. I guess in answer to the first question, Mr. Jelincic
-- COMMITTEE MEMBER JELINCIC: I've lost the
argument. You don't have to answer the question. SENIOR PORTFOLIO MANAGER MULLAN: Well, okay,
so the second question --
(Laughter.) SENIOR PORTFOLIO MANAGER MULLAN: -- we can
have that one off-line, but that could be a lengthy
discussion. With respect to the question of -- or the
point about increasing the risk of the program here
with this change, I don't -- I really don't think that's
what we're trying to do. I think what we're trying to
do rather is to allow ourselves to invest in opportunities
that suit the program. And as it stands today, those
opportunities have more leverage than where our limits are.
And so we have to come back to the Committee to execute
those. And in the real world, real-time deal process,
it's very difficult to execute transactions that way.
COMMITTEE MEMBER JELINCIC: But increasing the
leverage, by definition, is increasing the risk, isn't it?
I mean, how do you increase leverage and not increase the
marginal risk? SENIOR PORTFOLIO MANAGER MULLAN: Yeah, I don't
think we're looking -- so we're not looking to increase
leverage on the assets. I think we're just looking to
pursue assets that we think fit those risk classifications. And so we're saying for defensive,
defensive plus, we see a lot of transactions that are --
that have that much leverage in them, and we think it's a
normal sort of range for those types of assets. So we're just trying to get to the assets
that we think fit our risk classification scheme.
We're not trying to sort of up the -- increase the risk
profile. COMMITTEE MEMBER JELINCIC: So why not limit
the increase limit to those defensive which is
where you're telling us the problem is?
SENIOR PORTFOLIO MANAGER MULLAN: You know, good
point. I think, you know, that's something we should
consider. I guess I would say that we think the defensive
plus assets could be levered greater than 50 percent.
We'll see those from time to time. The other point on
that I think is that this whole classification scheme is
pretty subjective. And so at the margins is something
defensive or defensive plus, and do we want our ability to
transact sort of contingent upon people's interpretation
of whether something is defensive or defensive plus?
I think we just get into a gray area there if we
start staying you can do it for defensive, but you can't do it for defensive plus.
SENIOR INVESTMENT OFFICER ELIOPOULOS: If I could. It might be good to ask Meketa for
their thoughts on it as well. But from my perspective, you
know, the overall leverage limit is staying at the 65
percent level, which is, you know, a key piece. I think what
the team convinced me that it would make sense to allow
for some more flexibility within the individual investment
opportunities that they're seeing, particularly in the
defensive and defensive plus category, is to give them
some flexibility to pursue assets that have all those
qualities that we're looking for on the defensive side
that they can only access with leverage up to that 65
percent level. So it's really looking at that incremental
amount between 50 and 65. They'll have to manage.
We'll have to manage the portfolio construction to make
sure that in the aggregate, the total amount of leverage doesn't
go over that 65 percent limit, but it adds some risk
to the portfolio in the sense that individual assets
can be -- have more leverage risk in them. But on the
total portfolio construction side, they're not asking
for any increase. I think -- I know that we --
CHAIRPERSON JONES: Yeah, we'll ask Meketa, because I notice in your opinion letter you
do address that issue where the overall leverage will not be
increased. So if you can comment on that. MR. ALTSHULER: David Altshuler, Meketa
Investment Group. We agree with that and we looked at it
from the program perspective. We realized that this is
providing the team a little more latitude, in terms of
evaluating investments without having to come to the
Committee. It's not actually changing the amount of
leverage that could be used. It's -- without having to
come to you for approval of that. And when we looked on it -- when we looked
at it, we viewed it on an aggregate level and felt
that the portfolio wasn't, on an aggregate level, adding
more leverage. And we do agree with the characterization
of the defensive asset class as often having
a higher amount of leverage. It's sort of the inverse, I guess,
of real estate you see. So there's some confusion
there, I guess, across teams and what role leverage plays.
But for a lot of defensive infrastructure investments that -- of the sort that the program
is targeting, which have other large rate bases
or stable predictable cash flows, they often are able
to sustain without increasing the risk of the business
greater leverage. That was our view.
CHAIRPERSON JONES: Okay. Thank you. Okay. Seeing no --
COMMITTEE MEMBER JELINCIC: I have one other question.
It's on -- it was in B3. You've -- I guess it's
5B3. It's page 34. You've added both preferred and
common there, which I think makes sense, but there is
another case where you refer to the equities and don't use
the preferred and common. And I'm just encouraging you to
make it consistent. SENIOR PORTFOLIO MANAGER MULLAN: Thank you,
Mr. Jelincic. We'll look at that. Try to improve
the consistency. Thanks.
CHAIRPERSON JONES: Okay. Thank you for the presentation. That concludes the information
on infrastructure.
Now, we'll move to the next item on the agenda, Proposed Revision of the Real Assets Program
Policy, initial review.
CHIEF INVESTMENT OFFICER DEAR: We're good on
that Mr. Chairman. CHAIRPERSON JONES: Huh?
CHIEF INVESTMENT OFFICER DEAR: We're good on
that, Mr. Chairman CHAIRPERSON JONES: Okay. Thank you.
And so now we go to public comment. We have four
requests. Alyssa Giachino, Raul Macias, Leonar Guzman,
and Juan Dominguez. If you'll come to the front to the
mics, please. And each of you have three minutes for your
comments. MS. GIACHINO: Thank you, Mr. Chairman, Committee
members. Alyssa Giachino with Unite Here. You will --
I'm here with workers from the Holiday Inn, LAX. You will
recall they've been before CalPERS a couple of times
describing terrible conditions that they endured at the
hotel. Today, we are here with the good news that the
dispute at the Holiday Inn LAX has come to a peaceful
resolution. We want to thank CalPERS staff and Investment
Committee for taking the plight of the workers very
seriously and working to ensure that the issue was handled
responsibly and fairly according to your investment principles.
We also wanted to thank the CIM Group. CIM held
the mortgage for the Holiday Inn LAX. When the previous
owner fell into foreclosure, CIM assumed control of the
asset, which is part of the Urban REIT 2 Fund. CIM moved
quickly to resolve the labor dispute agreeing to a fair
and expeditious process for the workers to choose
unionization. We are very pleased with this positive outcome
to a bad situation, and we thank CalPERS for
your attention to this matter. I would like to offer a couple of
comments from workers. MR. MACIAS: Good afternoon. My name is Raul
Macias. I'm a bartender at the Holiday Inn in LAX. I've
been working there for about 15 years. Just a few weeks
ago workers at the Holiday Inn won union recognition. It
was very happy moment for everybody. We want to thank CIM
group, the new owners of the Holiday Inn at LAX for
agreeing to a quick path to the labor dispute. We also
want to thank CalPERS for listening to workers and helping
us to get fair process. Our struggle for justice at the Holiday -- at
the hotel over the past year was very difficult.
Under the previous owner, workers were fired and faced
intimidation. Now, we are very happy that CIM is working
with us to improve the hotel. We are proud to say we
are union. We are proud of the work we do to provide
good service to our guests, and we want to make
the hotel succeed.
Thank you. CHAIRPERSON JONES: Thank you.
MS. GUZMAN(through interpreter): My name is Leonar Guzman. I'm a housekeeper at the Holiday
Inn for 14 years. I want to thank CalPERS and CIM
to working to bring -- for working to bring justice to the
workers of the Holiday Inn LAX. The day we won union recognition was
very emotional for all of us. You should have seen how
the workers hugged and cried out of happiness. We won
what we deserved and now we have respect on the job.
Thank you. MR. DOMINGUEZ(through interpreter): My name
is Juan Dominguez. On behalf of me and my co-workers,
I want to give you my thanks.
CHAIRPERSON JONES: Okay. Thank you very much, and we're very pleased to hear that it did
have a positive outcome. Thank you very much for your time.
Okay. That concludes the open session. And so
this Committee is adjourned, and we will go immediately
into closed session.