What are the key takeaways from this Capital Allocators episode?

Key insights include: **Procyclical Risk Management:** CalPERS historically reduced risk during the financial crisis when assets were cheap and increased risk during market exuberance, the opposite of optimal long-term investing. TPA with a reference portfolio creates stable risk appetite through time, making any risk changes transparent and preventing emotional decision-making during market extremes that destroys value for long-horizon investors.; **Reference Portfolio Framework:** CalPERS adopted a 75% equity, 25% bond reference portfolio with approximately 400 basis points of active risk budget. This simple construct tracks the actual portfolio closely while clarifying management accountability. The board owns the reference portfolio and risk level, while management owns all active decisions and portfolio construction, eliminating the ambiguity of joint SAA ownership.; **Cost of Capital Methodology:** Investment teams must justify new investments by comparing expected returns against selling equities and bonds from the reference portfolio to fund them. For illiquid assets like infrastructure, teams add an illiquidity premium charge to the opportunity cost. This common language enables cross-asset class capital competition, preventing suboptimal capital allocation within siloed asset class buckets.

What did Stephen Gilmore discuss on Capital Allocators?

Stephen Gilmore, CIO of CalPERS, the $600 billion public pension fund, explains the Total Portfolio Approach he's implementing after leading similar transformations at Australia Future Fund and New Zealand Superfund. He contrasts TPA with strategic asset allocation, emphasizing governance improvements, accountability structures, and avoiding procyclical investing mistakes. Key topics include: **Procyclical Risk Management:** CalPERS historically reduced risk during the financial crisis when assets were cheap and increased risk during market exuberance, the opposite of optimal long-term investing. TPA with a reference portfolio creates stable risk appetite through time, making any risk changes transparent and preventing emotional decision-making during market extremes that destroys value for long-horizon investors.; **Reference Portfolio Framework:** CalPERS adopted a 75% equity, 25% bond reference portfolio with approximately 400 basis points of active risk budget. This simple construct tracks the actual portfolio closely while clarifying management accountability. The board owns the reference portfolio and risk level, while management owns all active decisions and portfolio construction, eliminating the ambiguity of joint SAA ownership..

How long is this episode of Capital Allocators?

This episode is 58 minutes long. SignalCast provides an AI-generated summary so you can get the key insights in about 3 minutes.

Capital Allocators

Stephen Gilmore – CalPERS' Total Portfolio Approach (EP.486)

February 9, 2026

58 min episode · 2 min read

Stephen Gilmore

Episode

58 min

Read time

2 min

Topics

Health & Wellness, Investing, Fundraising & VC

AI-Generated Summary

Published Feb 9, 2026

Key Takeaways

✓Procyclical Risk Management: CalPERS historically reduced risk during the financial crisis when assets were cheap and increased risk during market exuberance, the opposite of optimal long-term investing. TPA with a reference portfolio creates stable risk appetite through time, making any risk changes transparent and preventing emotional decision-making during market extremes that destroys value for long-horizon investors.
✓Reference Portfolio Framework: CalPERS adopted a 75% equity, 25% bond reference portfolio with approximately 400 basis points of active risk budget. This simple construct tracks the actual portfolio closely while clarifying management accountability. The board owns the reference portfolio and risk level, while management owns all active decisions and portfolio construction, eliminating the ambiguity of joint SAA ownership.
✓Cost of Capital Methodology: Investment teams must justify new investments by comparing expected returns against selling equities and bonds from the reference portfolio to fund them. For illiquid assets like infrastructure, teams add an illiquidity premium charge to the opportunity cost. This common language enables cross-asset class capital competition, preventing suboptimal capital allocation within siloed asset class buckets.
✓Active Risk Alignment: Under strategic asset allocation with 10% buckets, teams diversify within their silo even when returns are suboptimal compared to other asset classes. TPA allows concentrated asset class portfolios because diversification happens at the total portfolio level. New Zealand Superfund demonstrated this by allocating more active risk to highest conviction strategies, achieving ordinary hit rates but exceptional slugging averages.
✓Governance and Collaboration: Successful TPA implementation requires compensation aligned to total portfolio returns rather than asset class performance, improved liquidity analytics, and cultural emphasis on collaboration as a key leadership competency. CalPERS already had these enabling conditions in place. Regular stress testing exercises involving treasury, operations, and all asset class heads together build muscle memory for crisis response and prevent siloed thinking.

What It Covers

Stephen Gilmore, CIO of CalPERS, the $600 billion public pension fund, explains the Total Portfolio Approach he's implementing after leading similar transformations at Australia Future Fund and New Zealand Superfund. He contrasts TPA with strategic asset allocation, emphasizing governance improvements, accountability structures, and avoiding procyclical investing mistakes.

Key Questions Answered

•Procyclical Risk Management: CalPERS historically reduced risk during the financial crisis when assets were cheap and increased risk during market exuberance, the opposite of optimal long-term investing. TPA with a reference portfolio creates stable risk appetite through time, making any risk changes transparent and preventing emotional decision-making during market extremes that destroys value for long-horizon investors.
•Reference Portfolio Framework: CalPERS adopted a 75% equity, 25% bond reference portfolio with approximately 400 basis points of active risk budget. This simple construct tracks the actual portfolio closely while clarifying management accountability. The board owns the reference portfolio and risk level, while management owns all active decisions and portfolio construction, eliminating the ambiguity of joint SAA ownership.
•Cost of Capital Methodology: Investment teams must justify new investments by comparing expected returns against selling equities and bonds from the reference portfolio to fund them. For illiquid assets like infrastructure, teams add an illiquidity premium charge to the opportunity cost. This common language enables cross-asset class capital competition, preventing suboptimal capital allocation within siloed asset class buckets.
•Active Risk Alignment: Under strategic asset allocation with 10% buckets, teams diversify within their silo even when returns are suboptimal compared to other asset classes. TPA allows concentrated asset class portfolios because diversification happens at the total portfolio level. New Zealand Superfund demonstrated this by allocating more active risk to highest conviction strategies, achieving ordinary hit rates but exceptional slugging averages.
•Governance and Collaboration: Successful TPA implementation requires compensation aligned to total portfolio returns rather than asset class performance, improved liquidity analytics, and cultural emphasis on collaboration as a key leadership competency. CalPERS already had these enabling conditions in place. Regular stress testing exercises involving treasury, operations, and all asset class heads together build muscle memory for crisis response and prevent siloed thinking.

Notable Moment

Gilmore describes his first day as a manual laborer digging up a metal road with only basic tools, developing seven blisters. His father toughened his hands by pouring denaturalized alcohol on them. This formative experience shaped his resilience and willingness to take on difficult challenges like transforming CalPERS' investment approach.

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Episode Transcript

One of the things that has attracted value from the culpas experience has been a tendency to be too procyclical. If you think back to the time of the financial crisis, various assets were liquidated, this was taken off. That was done in part because of concerns about liquidity, concerns that didn't need to be acted upon, but there's an information challenge at the time. Information on liquidity has improved greatly since then, but risk was taken down. If you're a long term investor, that's exactly the time to be putting on risk. The same thing has happened when markets are more exuberant. Risk has been taken up. One of the big advantages of having a total portfolio approach with a reference portfolio is you tend to have a more stable risk appetite through time, and it'll be transparent if risk is taken up or down. Management now becomes more accountable because under a strategic asset allocation, yes, the management can make a recommendation to the board on the SAA. The board adopts it, and the question is who owns it because it's combined. It's a joint thing with a proposed approach for the total portfolio. The board adopts a reference portfolio and that corresponds to a particular amount of risk. But it's the management that is using this initiative to propose the portfolio and to invest the portfolio. The management becomes more accountable. It also becomes clearer how has the management team done relative to a simple off the shelf portfolio. I'm Ted Cites, and this is Capital Allocators. My guest on today's show is Stephen Gilmore, the chief investment officer of CalPERS, which at $600,000,000,000 is the largest public pension fund in The US and one of the largest institutional pools of capital in the world. Stephen joined CalPERS eighteen months ago from a career spanning Wall Street, the IMF, and two of the most innovative sovereign wealth funds, where he was chief investment strategist at Australia Future Fund and CIO at New Zealand Superfund. Our conversation dives into the theory and implementation of the total portfolio approach, drawing on Stephen's experience at Australia and New Zealand and his plans for CalPerps. We covered the TPA mindset, its fostering of sound governance and accountability, comparisons to strategic asset allocation, challenges of implementation, and the adaptation of the model at CalPERS. Steven is one of the most experienced practitioners of TPA in the world. Our discussion pairs well with my recent conversation with Ash B. Monk as more allocators learn and consider this approach to managing assets. Before we get going, Valentine's Day is right around the corner. I found there's two types of red in the air, the sweet scent of love, and the red of jealousy, envy, and frustration. Frustration. It's love we're all after. In my younger years, I was a forlorn romantic in search of happily ever after. Once I found it, the second time around, much of Valentine's Day has been a beautiful thing. …

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