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The California Public Employees' Retirement System (CalPERS) offers investors insight towards applying asset allocation and rebalancing techniques during the current volatile stock market environment. Participation in equity investments in 2008 was particularly painful given the 38% fall of the S&P 500. Let's take a look at how the largest pension fund in the U.S. with $183 billion in assets under management (as of December 31, 2008) limited its losses and plans to move forward during the current market decline. (Learn more about rebalancing in Rebalance Your Portfolio To Stay On Track.)

Ahead of the S&P 500
Granted the CalPERS investment portfolio began 2008 with $239 billion before it lost 23.07% of its value during the year, but what investors can take away is the investment strategy CalPERS began with and will follow up with in 2009.

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CalPERS Targets
CalPERS has a target allocation of 19% total global fixed income, 66% total equities, 10% real estate and 5% inflation linked investments. The targets were established in 2007 with a three to four year implementation time horizon. The equity portion is broken down further with 10% for alternative investments including private equity, 28% for domestic equities and 28% for international equities. Likewise the fixed income portion is broken down by 17% domestic and 2% international. The following are proxy exchange-traded funds (ETFs), that investors can consider for their own portfolios.

ETF Proxy for Investors
Asset Class
Current Target

Vanguard Long-Term Bond
Domestic Fixed Income
SPDR Barclays Capital Intl Treasury Bond
International Fixed Income
SPDRS Gold Shares
SPDRS S&P 500 Index
Vanguard Emerging Markets Stock ETF
Vanguard REIT Index
Real Estate
iShares Barclays TIPS Bond
Inflation Linked

Target allocation effective December 2007

Future Plans (Rebalancing)
Domestic and international equity investments were the main contributors for the loss in value of the CalPERS portfolio, but the losses also pushed the funds overall equity exposure below its +/- 15% target range. The CalPERS staff is looking to add public equities while maintaining liquidity in order to return the equity portion of the portfolio back to their pre-established ranges.

Cash Position
One of the most surprising highlights of the CalPERS allocation mix is the 0% target for cash while its current cash position is 8.3%. CalPERS maintains a 0-10% range for cash. Cash clearly offers a measure of safety against investment losses. The reasoning behind the low target range also reflects the importance of maintaining a focus on equities in hopes of outpacing the deteriorating effects of future inflation. (Be sure to check out our Inflation Tutorial to learn more.)

Final Thoughts
Establishing an asset allocation mix, approximate ranges and rebalancing may be time consuming activities, but the returns of taking these actions can be rewarding. Investors who would like to check up on CalPERS investment strategies should note that the next board meeting is scheduled for March 13-18, 2009.

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