CalPERS Emerging and Diverse Manager Forum

CalPERS Investment Overview and Plans for Emerging

Managers

Joe Dear

Chief Investment Officer

CalPERS Investment Office Strategic Priorities Performance: Achieve our target rate of return without exposing the fund to the undue risk of major drawdown Plumbing: Develop and implement the systems, controls, and processes necessary to assure the integrity of operations People: Ensure that we have the right number of people with the right skills to enable investment performance improvement and control of operations

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Our Strategic Priorities—Investment Office Roadmap • Deliver consistent risk-adjusted investment returns. Investment Performance

• Implement a risk-based, dynamic asset allocation approach. Capital Allocation

• Establish a comprehensive portfolio risk management system and practices to measure, manage and communicate investment risks.

Investment Risk Management

• Enhance cost effectiveness of the investment program to improve net returns on assets. Cost Effectiveness

• Enhance the ability of the Investment Office to recruit, develop and retain a high skilled, diverse and motivated team to ensure success.

Talent Management

• Design, develop and implement a robust, integrated operating model that minimizes complexity, improves transparency and strengthens processes, systems, governance and controls of the Investment Office.

Organization, Systems and Controls

Performance

People

Plumbing

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Asset Allocation: As Of September 30, 2012

Public Equity, 49.1%

Income, 17.8%

Private Equity, 13.5%

Forestland/ Infrastructure, 1.3%

Inflation, 3.1%

Real Estate, 8.9%

Absolute Return Strategy, 2.1%

Liquidity, 4.3%

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Annual Fund Performance vs. Benchmarks

4.3%

13.5%

9.2%

0.4%

7.7% 8.4%

3.6%

13.4%

9.3%

2.9%

8.6%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%

Fiscal YearTo Date

Sept 2012

1 YearFY

3 YearFY

5 YearFY

10 YearFY

Since Inception

Total Fund Returns Benchmark (CalPERS Policy Index)

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CalPERS Total Fund Returns by Asset Class

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1 Year 3 Year 5 Year 10 Year

Absolute Return Strategies Global Equity Fixed Income Real Assets Private Equity

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CalPERS Emerging and Diverse Manager Forum

CalPERS Investment Overview and Plans for Emerging

Managers

Joe Dear

Chief Investment Officer

CalPERS Emerging Manager and Diverse Manager Forum

CalPERS Five Year Emerging Manager Plan

Laurie Weir

Senior Portfolio Manager

Introduction • This presentation will cover:

- Objectives of Emerging Manager Programs - CalPERS Emerging Manager Five-Year Plan - EM Definitions, Exposure, and Performance - Diversity and Inclusion Initiatives

Objectives of Emerging Manager Programs • Generate appropriate risk adjusted investment returns by identifying

early stage funds with potential for strong investment performance

• Access to investment opportunities that may otherwise be overlooked

• Cultivate the next generation of external portfolio management talent

• Legislation requires CalPERS and CalSTRS to: - Commence a five-year plan for emerging manager participation - Submit annual progress reports to the Legislature - Define “emerging investment manager”

• CalPERS Plan outlines six work streams organized under Portfolio Management and four work streams organized under External Outreach

Emerging Manager Five-Year Plan

Work Streams in the Five-Year Plan • The Portfolio Management EM Program work streams include:

- Track and report the performance, cost and diversity of EM strategies - Global Equity’s review of their Manager Development and Fund of Funds EM

programs - Track and report progress of Private Equity’s $100 million and Real Estate’s

$200 million recent commitments to EM programs - Establish criteria for transitioning EMs to direct investment mandates with

CalPERS - Establish criteria for new capital to EM programs - Benchmark CalPERS EM program design and implementation against peers

Work Streams in the Five-Year Plan (Cont’d) • The External Outreach EM Program work streams include:

- Improve communication regarding investment proposal submittal and tracking

- Improve EM information on CalPERS website - Host and participate in workshops, webinars and conferences - Improve communication and strengthen relationships with

stakeholder organizations

Emerging Manager Definitions Emerging Manager definitions are established by each asset class. Programs may seek emerging managers domestically or globally. All program reporting will distinguish between domestic US and international emerging manager exposure.

Asset Class Parameters Global Equity ARS Global Fixed Income Private Equity Real Assets

Fund of Funds Fund of Funds Direct Direct Fund of Funds Mentoring Manager

Emerging Manager Program Name

Emerging Manager Fund of Funds

Fund of Emerging Hedge Funds None None Emerging Domestic Private Equity Managers Real Estate Emerging

Managers

Investment Strategy Long Only - Publicly Traded Securities Hedge Funds All Private Equity Private Equity - Buyout and

Special Situations Venture Capital Real Estate Separate

Accounts and Commingled Funds

Product Size No Requirement < $1B No

Requirement No

Requirement < $1B < $500M No Requirement

Firm AUM < $2B < $2B < $2B No Requirement

No Requirement

No Requirement < $1B

Length of Track Record No Requirement

No Requirement

No Requirement

First or Second Institutional Fund

First or Second Institutional Fund

First or Second Institutional Fund

First, Second, or Third Separate Account or

Institutional Fund

Geographic Focus No Requirement

No Requirement

No Requirement

No Requirement

Domestic US

Domestic US Urban California

Current Emerging Manager Exposure • CalPERS has approximately $10 billion currently invested with

emerging managers • This investment with over 300 emerging managers totals approximately

12% of CalPERS externally managed net asset value • CalPERS has committed $900 million to emerging manager programs

across several asset classes over the past three years

Diverse Manager Exposure • CalPERS has invested over $3 billion or approximately 4% of

externally managed NAV with over 80 diverse investment managers • Exposure through both EM programs and direct relationships • 2.6% of externally managed NAV invested with majority minority-

owned firms • 1.2% of externally managed NAV invested with majority woman-

owned firms

Definition of Diverse External Manager • Diverse Investment Management Business

- For-profit enterprise, regardless of size - Physically headquartered in U.S. or trust territories - Owned and operated by women and/or minority group members

• Minority Group Members - U.S. citizens and permanent residents - African American, Asian American, Hispanic American or Native

American based on 2010 Census classifications

Definition of Diverse External Manager • At time of investment, CalPERS Diverse Investment Management

Business is: - Substantially Diverse: 25 to 49% minority group and/or women-

owned - Majority Diverse: 50% or greater minority group and/or women-

owned

Definition of Diverse External Manager • Private Asset Classes – Private Equity and Real Estate

- Minority group members and/or women’s participation in carried interest in each fund managed by business

• Public Asset Classes – Global Equity, Global Fixed Income, Hedge Funds/Absolute Return Strategies - Minority group members and/or women's participation in the

investment advisory for each fund managed by business.

Work Streams in Diversity and Inclusion Initiatives • The Diversity and Inclusion work streams in CalPERS Investment

Office include: - Survey external managers and consultants for diversity in key

competency positions - Track and report CalPERS net asset value by asset class

managed by minority and women-owned external managers - Track and report the number of investment proposals submitted to

each asset class by minority and women-owned firms

Conclusion • The ten work streams established in the Plan are a significant

commitment of resources to ensure that CalPERS EM programs advance investment objectives

• The Plan provides a road map to build on our successes and identify opportunities for improvement in the future

CalPERS Emerging Manager and Diverse Manager Forum

Laurie Weir Senior Portfolio Manager

Joe Dear Chief Investment Officer