Calpers CIO sets out progress on total portfolio switch
Calpers chief investment officer Stephen Gilmore explains to AOX what stage the $563bn pension fund is at in its transition to the total portfolio approach and how it is handling some of the potential risks (Kena Betancur/Bloomberg)
California Public Employees Retirement System chief investment officer Stephen Gilmore said the $563bn pension fund is currently working on a target portfolio after its decision to adopt the total portfolio approach late last year.
Calpers, one of the largest pension funds on the planet, is on track to make the switch in July.
Speaking to AOX, Gilmore discussed the work going on behind the scenes to allow Calpers to move from a strategic asset allocation approach to a total portfolio approach and some of the questions the fund still needs to answer.
The Calpers board approved the switch to TPA in late November.
The transition marks a significant shift in how the system will construct and manage its investments. Under the new framework, the team must determine what the target portfolio should look like once traditional asset class boundaries no longer anchor capital allocation decisions.
“We're thinking about how best to use the active risk, or the discretion that we've been delegated by the board, and we want to align those areas where we have the highest conviction with the use of active risk,” Gilmore said.
Since the November vote, staff have been examining the portfolio’s building blocks to assess whether there are gaps, overlaps or areas where capital could be deployed with greater conviction.
Gilmore joined Calpers in July 2024 from the New Zealand Superannuation Fund, a sovereign wealth fund which uses the total portfolio approach.
For Gilmore, the framework is ultimately judged by its impact on funded status. The central aim is to build a portfolio that steadily improves the system’s funded ratio by evaluating assets alongside liabilities and calibrating risk accordingly.
With the funded ratio currently around 83 per cent— up from several years ago— the objective is to continue strengthening that position over time. According to Gilmore, investment staff are working with actuaries to determine acceptable risk levels and expected returns, ensuring the portfolio is aligned with the long-term goal of closing the funding gap.
Under TPA, risk is codified through a reference portfolio and an active risk limit. Calpers’ adopted reference portfolio is composed of 75 per cent equities and 25 per cent fixed income. The active risk limit will be set at 400 basis points, down from the current policy of 450 basis points.
“We have shared some information with the board, and we will update that we are conducting deeper analyses on all the various investment strategies we have,” Gilmore said.
The transition reflects a desire to break from the psychological and structural constraints of traditional strategic asset allocation. In contrast, a total portfolio approach is less anchored to asset class labels and benchmarks. Instead of optimising each bucket individually — a process that can lead to over-diversification within teams or unintended concentration risks across the fund — the focus shifts to optimising the portfolio as a whole.
Conceptually, Gilmore said, a broader perspective should improve prospective returns by encouraging a big-picture view of risk and capital allocation.
“From my perspective, the total portfolio approach is largely a mindset, and it's about constructing a portfolio that's consistent with the ultimate objective,” Gilmore said. “People would think that any approach they're taking is going to do that, but some approaches end up being a little bit too rigid.”
Gilmore conceded the transition to TPA was not without challenges. The move requires changes to governance structures, reporting practices and decision-making processes.
Calpers is developing an internal governance and investment decision framework, revising portfolio construction processes and streamlining investment policies ahead of implementation.
“There is risk. I think some of the bigger ones are internal, and that's about having the collaboration, the buy-in, because it is a transition for people,” he said.
He added that behind-the-scenes work is under way to make policies more concise and consistent with the new framework. Successful implementation, he said, will depend on collaboration, communication and high-quality information across the organisation.
“We're also thinking more about just how we report to the board, because one of the things that should happen with this move to a total portfolio approach, I think, is greater transparency and greater accountability for the team,” Gilmore said.
But Gilmore noted that the fund enters the transition with certain advantages. Among them is a change made several years ago by chief executive Marcie Frost to the investment team’s compensation structure, so staff are rewarded based on total portfolio outcomes rather than individual asset class performance — a shift that aligns incentives with the philosophy underpinning TPA.