US. Major Pension Fund Adds Leverage As Assets Push Half A Trillion
The CalPERS Pension Fund, has resolved to change its investment allocation next year. The new asset mix reduces public equity exposure adding exposure to private equity, fixed income and real assets.
However, the more interesting angle is that total exposure for the fund is now 105% rather than 100%. That is to say, the fund will borrow to fund its investment portfolio.
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Leverage
Though the fund has significant assets, its liabilities are large too. In fact, over time it’s estimated that what the fund will need to pay out will exceed its assets by around $100 billion on current assumptions. That’s one reason why the fund wants to increase its portfolio return. Leverage may be one way to do that. If you borrow money to invest, then if the markets perform well then your return will be higher.
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The Downside Case
However, of course, there’s a catch. One reason estimates of the market’s return are lower than previously is because assets such as stocks and bonds have generally increased in value in recent years. Yes, some of that is due to increased profits from investments. However, a lot of the increase in various assets is simply due to rising asset prices.
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