The California Public Employees’ Retirement System has chosen five global equity managers to generate investment returns by relaxing the “long-only” constraint in their portfolios.
“These managers have demonstrated risk-controlled strategies to more fully express their complete view on any given security,” says Rob Feckner, the Board President of CalPERS. “They should do the same for CalPERS by achieving an overall higher return than we might get by limiting managers to hold only stocks that they expect will perform well.”
The “relaxed long-only” strategy will allow managers in the new pool to “short-sell” US market shares accounting for up to 35 percent of their CalPERS portfolio’s total value. They also would take “long” positions in stocks up to 135 percent of portfolio value. The five managers selected for the pool already have experience in long-short strategies, unlike “long-only” managers who try to buy only the most promising stocks and avoid those that may be over-valued. They are: Analytic Investors, First Quadrant, Goldman Sachs Asset Management, Quantitative Management Associates and State Street Global Advisors CalPERS will reallocate assets from passively managed index fund accounts to pool managers as early as the first quarter of 2007. Allocations and manager recipients are undetermined. CalPERS will review their contracts annually for an undefined duration.
“This approach is another way we can diversify and improve the efficiency of our portfolios by using sophisticated managers who assess over-valued as well as under-valued stocks,” adds Charles P. Valdes, the Chair of the CalPERS Investment Committee. “We think there’s a potential multibillion dollar opportunity here as we pursue this strategy. We will start small and ramp up our commitment if the strategy generates the risk-adjusted returns we anticipate.”
Short-selling typically entails borrowing shares from a broker and selling them at the same price. The manager buys the stock back after the price drops, returns the stock to the lender, and profits from the difference between the two prices. Research indicates that risk-controlled long-short strategies can generate higher risk-adjusted returns than long-only managers.