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

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.