CalPERS’ investment portfolio consists of different asset classes, or types of investments. This ranges from investing in private companies through our Private Equity asset class to investing in bonds via our Fixed Income asset class.
We do this to help diversify our portfolio. This is important because when one asset class underperforms, as happens in any economic cycle, another asset class generally outperforms. Diversification allows CalPERS to lower risk, while also working to achieve our 7% targeted rate of return.
Just as diversification helps to balance risk in our total portfolio, it also helps within asset classes. A great example is our largest asset class, Global Equity, which invests in public companies. CalPERS holds more than $200 billion in stocks from companies based in nearly 50 countries, including the United States.
Why We Invest Outside the United States
Occasionally CalPERS members ask why we invest in companies outside the United States. One reason is it’s important to diversify to manage risk. If CalPERS were to only invest in companies based in the United States, it would greatly tie the success of the portfolio to the health of the U.S. economy. This would add a great deal of risk to the largest asset class in the CalPERS portfolio.
Secondly, CalPERS invests internationally when we identify companies in emerging markets with strong performance. Emerging markets include parts of India, Asia, and South America. These are markets that are growing and becoming more engaged with developed markets, such as the United States and Europe. As successful public companies in emerging markets come into our customized index, we invest in accordance with our investment policy (PDF). This helps CalPERS generate stronger returns to help pay benefits.
Why Divestment Doesn’t Work
Sometimes we hear from members or stakeholders asking us to divest from companies headquartered in certain countries. While we hear their concerns, we also know that divestment only hurts the CalPERS fund and does nothing to impact the companies or other countries. This is because divestment takes investment opportunities off the table and hurts our ability to generate returns. In addition, when we divest, another investor simply buys our shares, so there may be little impact on the company.
CalPERS has a strong voice. As an owner of a company, we can work with that company to change behaviors and improve its financial bottom line. If we’re forced to divest and our voice is silenced, we lose our influence and the CalPERS fund may suffer as a result. We succeed when the companies or industries we invest in succeed. We can’t make an impact if we’re required to stand on the sidelines.
In this global economy, CalPERS must invest on a global scale to help the sustainability of our fund so we can pay pensions for generations to come.