As I write this, Joe Dear and the CalPERS investment committee are debating and discussing the Investment Office’s Roadmap that outlines the fund’s key priorities and initiatives for the coming years. (For a live feed at 12:30pm, click here.) As you are no doubt aware, CalPERS has already come a long way in identifying the areas for remedy as well as developing a new asset allocation framework. But making policies is one thing – CalPERS has been quite good at that in the past – implementing those policies is another thing altogether. So some heavy lifting remains around the area of implementation. And, specifically, Joe Dear hopes to develop some specifc capabilities over the coming two years. In his words, he wants...
- “More dynamic framork, responsive to market conditions
- Key risks understood and managed
- Clear sense of our strengths and competencies we want to develop
- Integrated strategies for value creation that blend cross-asset class approaches
- Clear target operating model – strong operational data, governance, systems and controls
- High performance culture and quality employee experience
- Automated expense tracking and reporting systems, and improved cost effectiveness”
That’s all quite interesting and sensible, but what I found most interesting in the report was the “heat map” on page 19 that outlined the key risks that CalPERS sees as potentially getting in the way of achieving these objectives.
What’s the number one risk, you ask? Interestingly, it’s ‘data integrity’. That’s perhaps not as sexy as “corruption” or “financial crises”, but I assure you...CalPERS is spot on here. With mountains of information flowing from and to managers, custodians, internal accounting teams, consultants, state government and a variety of other internal and external service providers, how does a fund like CalPERS normalize, standardize, validate, clean and, most importantly, use its data in order to generate value? It’s a pressing question for all large funds, and I’m impressed that CalPERS recognizes this and its importance. (And, by the way, having seen many internal maps of the back and middle office infrastructure at other funds, I can assure you that the current “solutions” are a bit of a dog’s breakfast. So there’s plenty of work to be done in mitigating this risk.)
Interestingly, the next four ‘risks’ (of the 23 listed in the heat map as being of moderate to critical importance) include: Portfolio Data & Analytics; Control Environment; Ext. Manager / Partner Selection, Monitoring & Rights; And Governance / Stakeholder Support. It seems the biggest risks to the fund are all about getting reliable information about operations to decision makers. In other words, getting truth to power! I like it.
