A revitalised approach that prioritises active management, value-add strategies and the hunt for alpha in CalPERS $168.6 billion global fixed income portfolio is starting to pay off. Speaking during the pension fund’s annual review of the asset class, which accounts for around 30 per cent of the $556 billion portfolio, investment staff said fixed income has garnered around $600 million in value-add over the last five years despite a honed-down team.

The wholly active and internally managed allocation to investment-grade corporate debt has been one of the star performers amongst the five strategy seams in the portfolio that also spans sovereign bonds, high-yield, mortgage-backed securities and emerging market debt.

Investment-grade credit has posted a one-year absolute return of 6.5 per cent, amounting to an excess return of 31 basis points on an active basis, equivalent to $100 million in value-add driven by strong income from elevated bond yields.

Active value has come from overweighting and underweighting strong and weak companies in the index in an approach that came into its own during April’s Liberation Day volatility, when the team added risk at attractive valuations as the dispersion between corporate winners and losers widened.

Moreover, the performance of investment-grade credit particularly stands out given CalPERS has been underweight and defensively positioned the entire fiscal year, investment manager Brian Parks told the board.

ESG integration within investment-grade fixed income has also given the allocation a valuable edge.

For example, CalPERS profited after fundamental ESG analysis drawn from sister teams in sustainability and governance led by Peter Cashion and Drew Hambly informed the belief that last year’s strike action at defence giant Boeing would end, and production at the company would get back on stream.

CalPERS positioned accordingly, overweighting the company on the basis that it would get compensated for governance risk and there was an advantage in adopting a larger position because Boeing’s bonds were “trading cheap.”

“Once we came to that conclusion, [Boeing] became overweight in the portfolio,” said Parks.

ESG analysis in investment-grade credit explores ESG scores and the relevance of any downgrades to CalPERS underwriting processes. Parks said the team are currently focused on about 15 companies. Engagement is led by the CalPERS corporate governance team, which acts on behalf of both the credit and equity teams.

High-yield strategy in action

A similar active strategy of positive security selection also boosted returns in emerging market debt, an allocation that CalPERS only began two and a half years ago. Since then, it has added around $240 million to performance in a strategy where expert external managers still play a central role. Only 10 per cent of the allocation is internally managed.

In another step change, the high yield allocation has shifted from mostly passive to mostly active. Like investment-grade, the approach paid off during this year’s April volatility. More recently, CalPERS seeded $2 billion to J.P. Morgan Asset Management’s active high-yield ETF, drawn from an existing high-yield mandate.

“This is the first active high yield ETF – they tend to be passive [but it] fits with our active high yield strategy [and] it ultimately adds the ability to capture volatility going forward in the world and we are looking for more active opportunities,” said board president Theresa Taylor.

Elsewhere, the allocation to mortgage-backed securities tapped alpha in active, relative value trades and by increasing exposure to securitised credit.

Concerns about Fed independence

CalPERS staff said the current fixed income market is characterised by attractive yields. However, because credit spreads relative to US treasuries are historically “on the richer side,” the investor has a cautious outlook.

“We take more risk when assets are cheap – that may not be today,” said managing investment director Arnie Phillips, who also reflected on looming risks.

Federal Reserve independence and the size of the US budget deficit are front of minds.

“A world that loses faith that the Federal Reserve is independent will have a potential impact on the portfolio,” he said.

He said that a large deficit comes with large sovereign issuance which can crowd out other forms of financing, and he warned that the government will have to pay more to sell its bonds.

In another alarm bell, CalPERS investment advisor also warned that history shows indebted governments often resort to printing money in a short-term strategy that specifically benefits assets with a limited supply.

Alignment with TPA

The fixed income allocation is beginning to shift in line with CalPERS’ progress towards a total portfolio approach (TPA) that requires cultural and structural changes as the investor puts more emphasis on total performance and team effort, rather than individual asset classes.

For example, cross asset class collaboration is visible in investment director Justin Scripps crossing the floor to temporarily join the private debt teams working in insurance-linked securities and investment grade corporates, blurring the lines between public and private fixed income.

Moreover, the fixed income team already closely collaborates with the CalPERS treasury team on liquidity and leverage strategies, pushing the envelope on cultural, and staff, development.

The board heard that TPA will likely lead to higher correlations between equity and credit risk in global fixed income, requiring monitoring in the overall portfolio construction process and leveraging the ability TPA gives to invest anywhere in the capital structure.

Chief investment officer Stephen Gilmore has formally recommended adopting TPA with a 75/25 equity-bond reference portfolio and a 400-basis-point active risk limit whereby management has the discretion to pursue value-add and risk-mitigating strategies. TPA will replace 11 different benchmarks with a single view to evaluate management decisions.

There will be no change to CalPERS’ 6.8 per cent discount rate.

If TPA is adopted at the November board meeting, the strategy will go live from July 2026. The months in between will be spent on priming governance, reporting and collaboration strategies ahead of the off.

The introduction of TPA has been supported by nine board education sessions so far.

Condoleezza Rice, the 66th US Secretary of State and current director of Stanford University’s Hoover Institution, said that the new world order is likely to have several characteristics, of which there are already signs: countries will be more protectionist in their trade policies; the world will see a redistribution of security burdens; and those who fail to receive the benefits of globalisation will become louder voices.

At the Top1000funds.com Fiduciary Investors Symposium, Rice highlighted that some of these systemic shifts are not dictated by short-term events such as the Liberation Day tariffs (although they contributed to the overall momentum of change).

But what is certain is that the borderless economic cooperation between countries which the world has thrived under is being dismantled.

“Some of what we’re sensing and feeling are long-term, secular trends that have been developing for some time, and so a change in administration, one way or the other, will not change the international economic and security picture,” she told delegates at Stanford University.

“They [the rules] are not going to come from other great powers – Russia in particular is a disruptive power, and China thinks about an alternative system. So in some sense, it has to come from the United States and other like-minded players.

“Of course, floating over all of it is what is going to happen to the job anyway when we’re looking at technological progress like AI or robots, which already make it more difficult.”

As the US heads into its 250th anniversary next year, Rice said it’s a good opportunity to retrace early challenges in its history and how democracy guided it through periods of turbulence.

“When people ask ‘why do democracies fail’, they really ought to be asking ‘why did democracy succeed?’,” she said.

“It’s hard to get hundreds of millions of Americans to use these institutions, which are to channel – as the founders would have said – the passions, the values and the interests of human beings into something which we just don’t fight about… [but into] everything we actually agree.

“I would then make a case that for all of our problems, this is an extraordinary success.

“But this idea that because I disagree with you politically, somehow you’re not just my political opponent, you’re my political enemy; and the sense that you don’t have the best interest of the country or the people at heart if you disagree with me… I do think that rhetoric needs to calm down.”

In an endorsement of its hard work over the last year, Sweden’s Fund Selection Agency (FTN), the government agency charged with procuring and monitoring the funds on offer on the country’s premium pension platform, is already starting to see improved returns and lower fees from the wave of new equity funds it mandated last year.

“Comparing the new universe of equity funds to the old universe reveals a 150 basis point improvement,” Erik Fransson, executive director at FTN tells Top1000funds.com. In keeping with the organisation’s stated aims, the main contributor to that added value is higher performance, accounting for 125 basis points. The remainder of the benefit (25 basis points) comes from more favourable pricing or lower fees.

“It is a case of so far so good: we have come a long way and we are really satisfied with the work so far,” says Fransson.

Working Swedes have paid into the mandatory defined contribution state pension fund ever since it was established in 2000 and assets on the platform are forecast to double to $451 billion by 2040. Today, the entire “premium pension system” accounts for around $232 billion split between the FTN and default fund AP7 which manages a default option for savers who did not make an active investment choice. Members of the system can choose the level of risk and strategies for their savings.

The ongoing overhaul was rooted in a handful of fraudulent and other poorly performing funds on the platform in the past, a consequence of lax requirements on the funds offering their wares. In recent years, the number of funds on the platform has dropped from 900 to around 450 in a drive for quality that resulted in many falling away. The FTN will procure funds worth around $116 billion between 2024 and 2027.

Tier 1 institutional pricing

FTN’s latest mandates to both passive and active large and mid-cap Swedish equity fund managers show the direction of travel.

In passive, three fund managers have been awarded SEK 65 billion ($6.8 billion) across five funds. The average charges were 3.9 basis points, reduced from a “rich” 12.9 basis points and mandates were won by managers with more sophisticated risk mitigating strategies including how they handle changes in the index and the different index constituents, as well as experience with strategies like security lending.

“This is really close to Tier 1 institutional pricing and will add a great deal of value in the long run. It’s very exciting and we are satisfied with this especially as we are doing this in a fund format. Contrary to popular belief, not all index funds are created equal – the selected funds show strong value creation potential,” says Fransson.

The SEK 92 billion ($9.7 billion) allocation to seven active fund managers was awarded across ten funds and also achieved a “big reduction” in fees, down from an average of 30 basis points to 15 basis points.

In another endorsement of the jump in the quality of fund managers bidding for mandates, Fransson says that none of the managers were disqualified due to mistakes or poor responses. The value of assets under management in the categories won’t change under new management so managers have a clear idea of the amount of assets they will be able to manage from day one if successful, helping the agency secure the best price.

Managers pay a tender fee and if they are successful, a platform fee based on assets under management. These requirements have successfully deterred managers without a good chance of success from going through the lengthy RFP process. All FTN’s costs are financed by an annual fee of 0.5-1.5 bps of assets under management on the platform.

Tech funds and fixed income up next

In the next step, the organisation will announce the $11 billion allocation mandates for a series of new tech-focused funds. Once funds are selected to manage these assets, some 55 per cent of the total capital on the platform will either have been mandated or in process, equivalent to 90 per cent of the equity category.

The team is also working on $23 billion global equities mandate divided between European small-cap and Swedish small-cap.

Work to secure successful procurement of next year’s mandates to new fixed income and target date funds, balanced funds and liquid alternatives is already underway with a focus on adjusting the RFPs and designing the search. All funds have a daily NAV, and most will be UCITS compliant. There is no plan to add private markets to the mix.

Rolling out a total portfolio approach is rarely a linear process, as even its most experienced practitioners have warned that without careful resistance to old language, culture and structure, asset owners can easily slide back into the “comfort” of strategic asset allocation. 

Despite having adopted a TPA mindset since it was established in 2006, Australia’s Future Fund is still constantly resisting a “gravitational pull” back towards SAA-like tendencies, according to its former chief investment officer, Ben Samild, who was interviewed for a TPA report published on Tuesday.  

The A$318 billion ($209 billion) fund avoids words such as “my portfolio”, “benchmarks”, “sleeves” or “asset classes” in its institutional language and promotes “growth”, “income”, “portfolio impact” and other whole-of-fund focused terms. But old ways of thinking often re-emerge especially during times of stress.  

Externally, peer comparison, consultant inputs, board renewal and media narratives can impact the sentiment of investment teams.  

“When most of your peers are using SAA, it’s hard to be the odd one out,” read the report published by the CAIA Association and the Thinking Ahead Institute. 

“No TPA shop has actually ‘made it.’ For these organisations, it’s not about achieving or arriving at TPA status, it’s about resisting regression.” 

The TPA framework can also become less effective following a change in organisational structure resulting from a rapid expansion of mandate, assets or team headcount, but solutions to this problem can look different for various asset owners depending on their set-up.  

Some, like Australian state sovereign wealth fund TCorp, facilitate TPA collaboration by intentionally keeping a localised office and leveraging the proximity of its investment team. 

But Canada’s CPP Investments addresses the problem by expanding the usage of its completion portfolio, which was originally a “quasi-balancing/overlay portfolio” and has evolved to amplify or offset views from positions held by its bottom-up team. This maintains the flexibility allowed by a top-down view while benefitting from inputs from its on-the-ground, geographically diverse investment professionals, the report said.  

Asset allocation impacts 

In shifting away from SAA to TPA, asset owners are switching from a tracking error-driven to an opportunity cost-focused mindset, and one of its biggest manifestations is the way assets tend to be funded.  

For example, CPP Investments coordinates capital allocation decisions through a central investment committee which helps avoid “rigid deal-by-deal trade-offs” among bottom-up teams. Singapore’s GIC manages an overlay portfolio from the CIO’s office which addresses short-term funding needs or thematic exposures without disrupting long-term allocations.  

The report points out that this leads to a difference between tactical asset allocation in SAA and its equivalent in TPA: while the former is always in a mindset of “deviating from the constraints set forth by the governing body”, which are the policy benchmarks, the latter can act without them and identify what’s truly beneficial for the portfolio.  

Another asset allocation impact of TPA is that it gives funds ways to embrace more “esoteric” asset classes, such as insurance-linked securities and volatility-linked strategies.  

It also allows for more creative allocation decisions. Australia’s Future Fund combines defensive hedge funds with zero-to-negative beta and “substantial” venture capital exposure, for example.  

“While Future Fund didn’t go through a transition from SAA, this is a great example of how a TPA portfolio deviates meaningfully from peer portfolios that maintain more long-only beta benchmarks and exposures,” the report said.  

“These diversifying positions, while unconventional by SAA standards, were integrated for their utility in improving resilience and achieving objectives like inflation protection or return asymmetry.” 

Total view of risk 

The report observes that under TPA, funds tend to be willing to tolerate higher tracking errors relative to a reference portfolio, which is a low-cost, index notional portfolio that aligns with an investor’s risk appetite and investment horizon.  

This could be a result of TPA practitioners focusing more on the total fund objectives, rather than prescriptive measures in risk management, the report said. TPA funds can focus on a variety of key risk indicators including shortfall risk, surplus variability, or drawdown and recovery resilience rather than “measuring volatility for its own sake”. 

Canada’s University Superannuation Scheme (USS) focuses on funding gap volatility as a key risk indicator to manage its liabilities and responsibilities to beneficiaries.  

GIC, meanwhile, keeps a close track of long-horizon strategic risks and short-term market dislocations by managing risk across three layers: long-term policy portfolio, 10-year strategy buckets, and 3-5-year overlays.  

There is a lot of creative room afforded by TPA for investment problem-solving, but the report highlights that one of its drawbacks is complex governance.  

“Boards must trust management to make judgment-based decisions that align with long-term goals. Management must trust teams to collaborate rather than compete. And investment professionals must trust that their value is measured beyond a benchmark,” it said.  

“As Geoffrey Rubin, senior managing director and chief investment strategist of total portfolio management framed it: The role of the governing body is to set the problem up very clearly. Then the question is: how much latitude does management have to solve it?” 

The $50 billion-plus South Carolina Retirement System Investment Commission’s (SC RSIC) shift into positive cashflow has enabled an increased allocation to private equity and private credit.

The changes, which are expected to boost long-term returns, took effect on July 1 following a five-year strategic review.

“The better that liquidity position is, then it gives you a greater ability to have more exposure to the things that we think are going to add value over their public equivalents over time, like private equity, private debt, private real assets and hedge funds,” chief executive officer Michael Hitchcock said in an interview with Top1000funds.com.

Funding reform, improved salaries, and positive investment returns have flipped the defined benefit plan’s position from about four per cent cash outflows in 2016 – roughly $1 billion of annual outflows on its then-$30 billion size – to about one per cent cash inflows today.

“That’s self-reinforcing because you don’t have those outflows, you’re able to invest in the things that are giving you a better return. So that really has a multiplier effect for helping improve funded status.”

Private equity was boosted by three percentage points to 12 per cent of the portfolio while private credit was increased by one percentage point to eight per cent. Those tilts were funded from the plan’s equity and bond allocations.

Interim chief investment officer Bryan Moore said private equity was SC RSIC’s “purest expression of risk”.

“Back in 2019, we were talking about having a nine per cent private equity target – we were always underweight private equity,” he said.

“We didn’t have a very consistent deployment schedule and we really refined our sourcing methodology, as well as our use of co-investments, and that has very much allowed us to move this portfolio into something that feels very high quality.”

The fund targets smaller managers and co-invests alongside them to moderate the impact of the J-curve.

Over three years, the asset classes that delivered the highest excess returns above their benchmarks were real assets ($922 million added return), portable alpha ($675 million), and private equity ($480 million).

Infrastructure makes up about one-quarter of the fund’s real asset portfolio (about 3 per cent at the plan level) and has provided strong consistent cashflows that match the plan’s long-term liabilities.

“We really want to get the more core-like infrastructure assets that look and behave like infrastructure assets versus opportunistic where you’re using maybe an infrastructure asset, but with a private equity playbook,” he said. “We’re not doing infrastructure that has more of an operating company play to it.”

The fund’s portable alpha strategy has also delivered, adding about $1.8 billion to the plan since 2018 with no down years, Moore said. It uses Treasury futures to fund its exposure to equity market-neutral and multi-strategy hedge funds.

“I think scalability is going to be hard as we think about a plan that’s growing. We have a lot of relationships from when we were $30 billion plan that no longer need more capital, that are returning profits to us.”

While the SC RSIC is banking on private assets to deliver long-term outperformance, it was strong equity markets that drove the bulk of its 11.34 per cent net gain in 2024-25. Its equity portfolio is passively indexed to the MSCI ACWI IMI Net index.

Equities make up the bulk of its portfolio, which was simplified in 2020 across five asset classes: public equity (43 per cent), bonds (25 per cent), private equity (12 per cent), private debt (eight per cent) and real assets (12 per cent).

The fund has held its position close to benchmark across the calendar year given high levels of uncertainty following the Liberation Day announcement in April.

“There’s so much noise happening in the world right now that we’ll see what wave crashes, and then we’ll adjust the portfolio as we see that happen, but I think that’s where having that optionality and the ability to counterattack is really a valuable part of our portfolio.”

The US has long been the global leader in technology innovation, with Silicon Valley and the entrepreneurial spirit that pervades it putting American companies at the forefront of global equity markets for decades.

But China is now challenging that lead, Ben Way, head of Macquarie Asset Management told the Top1000funds.com Fiduciary Investors Symposium at Stanford University.

“The US is the most innovative and entrepreneurial economy. However, across a range of tech and energy sectors – advanced materials, hydrogen, robotics, synthetic biology – you can make the case that China is leading. And I think this is one of the stories that’s quite misunderstood. It’s an interesting debate to be had about who is currently the most advanced.”

Shenzhen – where Way has visited BYD’s Pingshan campus – looks like “the city of the future”, and is a hotbed of technology and innovation, led by robotics and EV technologies.

“The ability of CATL (EV battery manufacturer) or BYD to produce more and more advanced technologies at scale at 7-sigma precision is real. Especially when you consider other competitors are struggling to deliver innovation at 6-sigma.”

But Way said that “massive” opportunities like decarbonisation, deglobalisation, demographic change and digitalisation aren’t limited to these two superpowers – and that he’s more excited as a real assets investor today “than at any other time” in his career.

“For example, today, you can deploy large-scale capital in Japan, including taking control of companies across multiple sectors. That wasn’t a huge opportunity set 5-10 years ago,” Way said.

“You can do the same thing in Korea, which is our biggest market in Asia. We have some 40 portfolio companies there today dating back to the early 2000s. That has been a market where you could have an impact at scale for some decades – we helped build the bridges and the roads that allowed Korea’s economy to really pivot into tech export after the Asian currency crisis.

Macquarie is also exploring emerging markets for deals. While some sectors are fairly richly valued at the moment, the opportunity set is staggering. For example, the vast majority of India’s vehicles still run on old diesel engines, and in a nation of 1.4 billion people, the opportunity to electrify and modernise transport is “significant and needed”.

“Opportunities are coming from everywhere. The rise of deglobalisation, particularly around security – whether it’s supply chain security, critical minerals security or energy security – is creating a new opportunity set in most countries around the world, particularly the top 30 investable markets for institutional capital. This thematic is much more pronounced than it was five years ago.

So, while I wish the world was calmer, while I wish there was less polarisation, while I wish for less volatility (and fairer access to education) … I am excited about the real assets opportunity set, and I am an optimist.”