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

Episode Summary

Executive Summary: Stephen Gilmore explains why CalPERS is moving from strategic asset allocation toward a total portfolio approach: to reduce pro-cyclicality, improve governance/accountability, and make capital allocation more transparent and dynamic. Drawing on experience at Future Fund and New Zealand Super, he emphasizes stable risk appetite, common portfolio-wide language, scenario testing, and using CalPERS’ scale and liquidity advantage more effectively.

Main Topics: What Total Portfolio Approach (TPA) Means (Priority: 5/5): Gilmore frames TPA as a mindset that builds the portfolio to meet the fund’s ultimate objective, rather than optimizing separate asset-class buckets. The reference portfolio serves as a clear risk anchor and a way to evaluate decisions at the whole-portfolio level. Governance, Accountability, and Pro-Cyclicality (Priority: 5/5): He argues TPA improves governance by making management more accountable for portfolio decisions and reducing the tendency of large institutions to cut risk in downturns and add risk in exuberant markets. CalPERS’ Transition to TPA (Priority: 5/5): CalPERS is moving stepwise, using a reference portfolio, active-risk range, and communication with the board to adapt TPA to its own constraints, funded status, and existing compensation/liquidity improvements. Comparisons Across Sovereign Wealth Funds (Priority: 4/5): Gilmore contrasts Future Fund and New Zealand Super, noting that objectives, horizon, funding structure, and lived experience produced different versions of TPA—one more discretionary, one more systematic. Portfolio Construction, Risk Budgeting, and Scenario Analysis (Priority: 4/5): He stresses common language across asset classes, risk matching investments to equities/bonds, charging for illiquidity, and using scenario analysis rather than relying only on historical correlations. Scale, Liquidity, and Private Markets (Priority: 4/5): CalPERS’ size creates both advantages and constraints: stronger negotiating power, more co-investments, and access to larger managers, but difficulty making small allocations and scaling active bets in private markets. Technology, Data, and Decision Processes (Priority: 3/5): Improving system integration, dashboard visibility, and analytics is essential for whole-portfolio management. Gilmore sees data simplification and future AI use as important enablers of better decisions.

Key Arguments: TPA is fundamentally about investing the portfolio as a whole to achieve the fund’s objective, not managing independent asset-class silos. A reference portfolio creates a stable, transparent risk anchor and clarifies whether management increased or reduced risk over time. TPA improves accountability because management, not the board, is responsible for proposing and executing the portfolio. Strategic asset allocation can encourage pro-cyclical behavior; TPA is designed to counter that tendency through a steadier risk appetite. CalPERS’ existing improvements in compensation, liquidity management, and data systems make TPA more feasible. Comparing investments requires a common framework for opportunity cost, liquidity premium, beta, and risk contribution across public and private assets. Scenario analysis is more useful than relying only on historical correlations because shocks differ across growth, inflation, real-rate, and risk-premium environments. Scale is an advantage when negotiating economics and building partnerships, but it makes smaller active allocations and niche managers harder to access. The success of TPA depends heavily on collaboration, education, and shared language across investment teams and governance bodies.

Data Points: CalPERS AUM: $600 billion - Describes CalPERS as one of the largest institutional pools of capital in the world. Members served: 2.4 million - Gilmore references the beneficiaries CalPERS invests for. Funding status: 80% funded - Used to justify a growth-oriented reference portfolio. Reference portfolio: 75% equity / 25% bonds - CalPERS’ recommended reference portfolio under the TPA framework. Active risk range: around 400 bps - CalPERS’ proposed active-risk band around the reference portfolio. Estimated delegated active risk under SAA: around 450 bps - Management estimated existing policy ranges implied this level of active risk. Future Fund starting capital: AUD 60 billion - Explains why Future Fund began with a more conservative posture. New Zealand Super start period: around 2003 - Used to contrast the institution’s longer horizon with Future Fund. Future Fund operating start: 2007 - Shows why its founding context differed from New Zealand Super. Private equity success period at CalPERS: since 2022 - Gilmore notes the strategy has been especially successful recently.

Pivotal Quotes: "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." — Stephen Gilmore: Explaining why TPA can reduce pro-cyclical behavior and improve transparency. "The board adopts a reference portfolio, and that corresponds to a particular amount of risk. But it's the management that is using its initiative to propose the portfolio and to invest the portfolio." — Stephen Gilmore: Describing how TPA changes governance and accountability at CalPERS. "It's more about a mindset. The most important thing is that the portfolio is built to try and achieve the ultimate objective." — Stephen Gilmore: Defining TPA as objective-driven rather than bucket-driven.

Implications: TPA may become a leading model for large allocators, but only if governance, collaboration, data, and common risk language are strong enough to support more dynamic portfolio-wide decisions.