CalPERS to put $1 billion to $1.5 billion into junk bonds

New York, Dec. 18 - CalPERS, the largest U.S. public pension fund, is to put a further $1 billion to $1.5 billion of assets into high-yield bonds.

The Sacramento, Calif.-based fund's investment committee approved the move Monday.

Following a search for managers, CalPERS will invest the money with Highland Capital Management, Shenkman Capital Management, ING Ghent Asset Management, PIMCO and Nomura Securities Corp.

Finalizing contracts for a move of this kind typically takes one to three months, according to a CalPERS spokesman, with the money flowing at some point after that.

The decision follows a March decision to raise CalPERS' permitted high yield allocation to 10% from 5% of fixed-income assets. At the end of last year, CalPERS had $557 million in junk bonds. CalPERS has total assets of $158 billion.

The pension fund took the decision to invest in high yield because of the high returns on offer - and evidence that active management could help performance further - and the low correlation of high yield to other fixed income sectors. Each additional 5% of the fixed income portfolio invested in junk bonds is seen as adding nine basis points to the overall returns.

Employing the external high yield managers will cost an estimated $5-$10 million, depending on the amount of assets managed, according to documents prepared for the CalPERS investment committee.

But the documents added: "This cost is expected to be more than offset by the increased returns to the fixed income portfolio and the risk reduction effects from the lower correlation of high yield to the total core fixed income portfolio."

External managers will also help train CalPERS analysts.

CalPERS five managers will give it "a broad range of coverage in the non-investment grade market."

Shenkman and PIMCO were chosen as managers in the higher quality, more conservative area while ING Ghent and Nomura cover the more aggressive area. Highland gives CalPERS exposure to the bank loan market.

The managers were chosen from an initial target group of 78 managers. Final selection included interviews of three to 3.5 hours with 11 managers.

CalPERS began investing in high yield in 1986 as a way of moving out on the efficient frontier.

However rising default rates and the problems at Drexel Burnham Lambert led to a re-examination in 1990, followed by liquidation of the portfolio beginning in July 1991 and completed in March 1993. Later that year investment was approved on a limited basis.

In 1996 CalPERS set a policy of putting up to a maximum of 5% in high yield, managed internally and focusing on higher quality credits. CalPERS staff concentrated on the higher quality names - and will continue to do so - because they had mainly debt characteristics to which the managers' experience running an investment-grade portfolio could be applied. Lower quality credits were seen as needing a greater emphasis on equity analysis.

As of Dec. 31, 2000, CalPERS had $557 million in high yield, 1.5% of the total fixed income portfolio. During 2000, it generated a 6.44% return.

End

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.