CalPERS Approves Changes to Domestic Equity Portfolio; Fund to begin active management in-house.

SACRAMENTO, Calif.--(BUSINESS WIRE)--March 17, 1997--The California Public Employees' Retirement System (CalPERS) voted today to reorganize management of its domestic equity portfolio to further enhance returns to the Fund.

The plan includes the following key changes:

-- developing an internal active management capability to manage a portion of the Fund's domestic equity in-house;

-- improving the outreach to potential external managers by streamlining the external manager contracts solicitation process to attract more applicants capable of adding value to the fund;

-- revamping the pay-for-performance fee schedule for external managers to attract managers and better align the interests of CalPERS and its managers.

-- creating specialized benchmarks for each manager for evaluating and monitoring purposes;

-- creating a specialized passive management fund to complement active management performance.

"Today's actions will help us capture significant returns in a market full of opportunity at minimum risk," said Charles P. Valdes, Chair of CalPERS Investment Committee. "We're maintaining our passive portfolios as a sound foundation, seeking aggressive equity managers, and adding a specialized investment portfolio to control risk in an effort to open doors to new opportunities for the Fund."

Roughly 84 percent -- or $39.3 billion -- of the Fund's domestic equity assets are now passively managed internally and $1 billion is managed by one external small capitalization passive manager, while the remaining 13 percent are managed actively by external fund managers. Under the new structure, active management of domestic equities could increase to 20 percent.

The specialized passively managed investment vehicle created by CalPERS would be a completion fund. It is designed to complement the performance of active managers and manage risk by closing the loop between the Fund's strategic asset allocation decisions and tactical external manager decisions. The investment fund would effectively fill in any market "gaps" absent from the composite of external money managers' investment portfolios.

The CalPERS Board also approved a request for proposal (RFP) process that would be used to conduct a nationwide search for external domestic equity managers and passive small capitalization equity managers. CalPERS currently oversees 11 external domestic equity firms that manage approximately $7.2 billion of the System's domestic equity investments.

The RFPs will be published on the Internet. The RFP process has been specifically designed to attract a broad universe of potential firms through the use of CalPERS existing web site.

Unlike the current structure, managers selected would be allocated equity assets based on their management capacity to handle the assets. External managers will be measured against specialized benchmarks that will help identify immediate performance problems. Currently, most manager's benchmarks are broad market indices such as the Standard & Poor's 500 Index.

In addition, managers fees will be tied to performance on a sliding fee schedule that prevents encouraging asset growth regardless of performance -- typically found in flat fee arrangements. The fee structure would help CalPERS attract effective firms and more closely align interests of the System with each manager.

"When a manager performs well, the firm will be compensated. When performance lags, CalPERS will pay a lower fee," added Valdes.

Draft RFPs for domestic equity managers and passive small capitalization equity managers will be presented to the System's Investment Committee in April. If approved, the RFPs would be issued immediately thereafter.

CalPERS is the nation's largest pension fund with assets totaling more than $110 billion. The System provides retirement and health benefits to nearly one million active and retired public employees and their families.

CONTACT: CalPERS

Brad Pacheco/Pat Macht, 916/326-3991