CalPERS is considering adopting a new investment strategy. What is it?
Every four years, California’s largest public pension fund undertakes a reevaluation process to balance its anticipated investment returns with the expected cost of benefits paid to retirees. This process, known as the Asset Liability Management cycle, is designed to ensure that the California Public Employees’ Retirement System is sustainable for years to come.
This year, the country’s largest retirement system is considering adopting a new approach to investing as part of its four-year cycle. During next week’s board meeting, the CalPERS Board of Administration will vote on whether to adopt an investment strategy known as Total Portfolio Approach.
The new strategy isn’t really a change to which investments CalPERS will make. Rather, the Total Portfolio Approach changes how managers make investment decisions. The investment strategy will promote more collaboration among CalPERS staff, said CalPERS Chief Investment Officer Stephen Gilmore — to ideally produce higher returns on the fund’s assets.
“It really means that there are going to be more communications across teams,” Gilmore said, adding that teams across the investment side of CalPERS will share information and compare the “attractiveness of different asset classes,” which include public equity, fixed income, private equity and private debt, among others.
While he doesn’t yet know how his fellow board members will vote, Investment Committee Chair David Miller predicted that the board would adopt the strategy, which CalPERS has been discussing since last year.
“For CalPERS members, in practical terms, it’s not going to look much different,” Miller said. “You’ll still be seeing the same kinds of reporting, the same kind of materials.”
To describe the somewhat nebulous Total Portfolio Approach, Miller offered a useful analogy: CalPERS has various assets, or “buckets,” that are funded to different degrees. Under the current approach, CalPERS allocates a certain amount of money to each bucket and managers of those assets try to maximize returns. But with the Total Portfolio Approach, CalPERS managers across assets will work together to determine which bucket should receive more of the fund’s money to produce better returns.
One change is how the fund’s success will be measured. CalPERS staff is recommending that as part of the transition from Strategic Asset Allocation to a Total Portfolio Approach, the board should adopt a reference portfolio that is made up of 75% equities and 25% bonds, which will be used as a metric to measure how well the fund is performing.
The 75/25 portfolio reflects a moderate increase in investment risk compared to the current Strategic Asset Allocation portfolio. CalPERS expects the higher risk will result in a moderate increase in investment returns and “not significantly increase the risk of contribution spikes or severe funded status declines,” according to board documents provided ahead of next Monday’s Investment Committee meeting.
CalPERS will continue monitoring the fund’s overall health using the funded status, which is the percentage of the money CalPERS has on hand to cover the retirement system’s total obligations. As of July, CalPERS’ funded status was 79%.
Last month, Gilmore sat down for a Q&A about the Total Portfolio Approach and how he hopes it will strengthen public employees’ retirement security. (This conversation has been edited for length and clarity.)
What is the Total Portfolio Approach? And why is the board considering adopting it?
Over the past few years, we’ve pursued what is referred to as a Strategic Asset Allocation approach. What that means is that periodically, in our case, every four years, we go through and look at how we should invest the portfolio, and we come up with targets for various asset classes. We will do that exercise in full every four years and we’ll check in every two years. So basically, each asset class has a target and (the investment teams) go and invest according to those targets.
With a Total Portfolio Approach, you can think of it really as an evolution of that Strategic Asset Allocation approach, where it becomes more continuous. So rather than having this four-year review and then having targets and pretty much sticking to them, we will essentially be doing that process more frequently.
Practically, you probably won’t see that much difference, because a reasonable part of our portfolio is invested in private assets or liquid assets, and they don’t move very quickly.
What are the advantages of the Total Portfolio Approach?
One is the prospect of generating somewhat higher returns. Now, this particular point gets debated a bit because there aren’t like a huge number of funds that are adopting a Total Portfolio Approach, but there are some very big, influential global funds that have done that.
There was a recent survey of 26 of the largest global funds, which showed that those who had adopted a Total Portfolio Approach had generated somewhat higher returns in that particular study. It was equivalent to 130 basis points, or more than 1% per year over a 10-year period.
I think that’s ambitious, but I do think logically taking a total portfolio approach, we are thinking about the whole portfolio, rather than just individual asset classes. It’s really like trying to optimize for the whole rather than optimize bit by bit and that, I think, will increase the prospect of generating somewhat stronger returns, and stronger returns mean higher funded ratio and lower contributions other things being equal.
How will CalPERS determine the success of the Total Portfolio Approach?
The primary measures of success will be some big picture measures. Have we improved the funded ratio through time? That’s what’s really important to our members, and to the employers, because the objective is to ensure that the pension system is sustainable. Currently, we’re just a little bit above 80% funded, and of course, we’d like to see that funded ratio improve through time. (Gilmore said the retirement system’s funded status has increased since CalPERS’ July report.)
We’re proposing to establish a very simple reference portfolio — and you can think of that as being like an off-the-shelf equity and bond portfolio, almost a bit like an (Exchange-Traded Fund) — so it’s very clear what that alternative is and you can judge the management against that alternative.
You can say, ‘OK, management team, have you done better than a simple off-the-shelf?’ That simple off-the-shelf reference portfolio is also a good way of expressing risk, and that helps from a governance perspective, because if we decide to deviate from that amount of risk, it’s very clear and I think that will help us be more consistent through time.
(Currently, CalPERS uses 11 different benchmarks to measure the success of each asset class. Gilmore said the retirement system will still monitor the success of individual asset class teams relative to industry standard, but the reference portfolio will be the primary metric of the fund’s performance.)
Is there anything that’s lost by transitioning from 11 benchmarks to a single reference portfolio?
I think in some ways, with the Strategic Asset Allocation, it’s very clear all the teams know what their target is and they just go and invest. So there is some loss of certainty with that. But what we’re doing instead is trying to generate better performance and to make sure that we’re investing in the best places.
Because if you’ve got targets for each asset class, the asset class teams tend to become more siloed, and they just go off and invest. And it could be that there are better opportunities elsewhere. Or it could be that their asset class is particularly attractive relative to other asset classes and we’re missing out on making additional investments there.
So I would say in terms of your clarity of governance, Strategic Asset Allocation is very clear, but it comes with a lot of disadvantages that we’ve talked about in terms of the advantages that our Total Portfolio Approach will bring. I would think more of this really as an evolution.
This story was originally published November 11, 2025 at 11:00 AM with the headline "CalPERS is considering adopting a new investment strategy. What is it?."
