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Let's talk about a person who is driving markets all the time. Marcy Frost joins us, the CEO of CalPERS, one of the largest equity holders in the country, in the world.
Marshy, thanks so much for joining us.
I want to start with just a breakdown of how much you hold and where you're putting it. I think it's something like one hundred and sixty billion dollars in stocks and the majority the lion shares here in North America.
Do you think about diversifying.
Out as other regions grow Europe, Asia, Africa, or because you represent you know, workers in America, do you want to invest the mass of your money here.
So we are a five hundred billion dollar portfolio and just under fifty percent of that is allocated to global equity. So we have really taken more of this tilt to follow where we think capital formation will occur, and some of that tilt has moved us more globally than domestically.
So what about in terms of tech investment, because you have a massive chunk there and you've boosted I think your allocation to ship stocks like Nvidia, which have done really well. Does that continue to grow the portion of big tech stocks in your portfolio, or do you start to take profits.
Yeah, So most of the global equity portfolio is really done through index funds, So we're holding those companies at the weighting and the index based on the allocation. Where we see more direct investing or direct opportunities will be more on the private assets and how we're deploying capital to venture capital, whether that's a climate technology play, whether
that is a climate transition play. But on the public equity side, for the most part, we are just holding the weight of that company in the portfolio.
In terms of the private market investments, how big how big of an action is that, because these investments can be fairly opaque, right.
I think Chris Ayleman from.
Cal Stirs has said it's like a moving bulls eye and you don't know until three years later after you've hit it.
Plus they're very expensive, right, So we have we just moved our allocation target to both private equity and private debt. We increase those just back in November, So we're moving from a thirteen percent private equity allocation, moving that up by four and then also increasing our private debt. So there is a bit of opaqueness in private equity. These are private companies portfolio companies, but it's not really opaque
to the investor. We can have the same interactions with a GP and a portfolio company that we can have with a public company. So even though the returns on those have been a little slower to capital to be returned to CalPERS, we still have a lot of conviction in the private markets, private debt in particular, and also private equity as we've changed really the way that we've implemented private equity. We have a long history of really investing in the large megafunds, the buy up funds, the
fund of funds. We are now with this increased allocation, moving more that into the co investment space, which does not have that feed drag that you mentioned.
But you're increasing your allocation in part because you've done so well with those investments in the past. What kind of returns do you expect from private equity and private credit, so.
On the private equities part of the portfolio, it's one hundred and fifty bits above what we would get out of regular passive strategy and public equity. Private debt is something that we have a little more connection with and that's ranging somewhere in the seven to ten just depending on market cycle.
What about the costs, I mean, we always hear about.
The costs for capital and then the profit sharing costs. Two and twenty is the famous number that the retail investor may get. But you're obviously a much bigger presence. Do you have the way to negotiate down those costs?
We do have theity to negotiate costs. It a little bit differently than maybe some of our smaller counterparts. But I think what is more important in the strategy as it sits today is the co investments, and we're able to, you know, really pick the managers we want to do business with and then sit alongside them on a co investment deal. We spend a lot more time on manager selection than we do thinking about what a portfolio company
or a sector might be. That conviction with a manager is really where we're spending our time.
What are you looking for as a manager.
So we want someone who has you know, has a track record. We want to work with someone who is transparent with us around how those portfolio companies are being managed.
We just instituted labor principles across the portfolio, and in particular, we want to see how our private equity managers will attest and make sure that you know, workers have freedom of association, that workers have rights to safety, that workers have benefits that would be commensurate for the type of work that they're doing, but that they have a safe and healthy workplace. So those labor principles just came in.
We're having our GPS our general partners sign on that they attest to largely abide by these principles, and then any new deal would have to be signed on to
as well. So we're looking for companies who had value alignment with us, want to do value creation of the long term and understand that we're a public pension fund and there are certain things at a public pension fund based on us representing workers public sector workers that maybe private equity of the past twenty years ago, though some of those practices have had to change over the decades, and I think the gps have been doing a great job there, but we want to make sure that there's
value alignment.
I imagine it's even more important to get what you want in terms of choosing a chief investment officer. You've just named Steven Gilmour of New Zealand Fund as your next CIO.
How difficult was that?
I know Cawsters also is looking for a new CIO right and it must be a very competitive space.
It is a very competitive space.
And when you're thinking about the scale and the public nature of CalPERS, you find yourself in this place where there aren't a lot of truly qualified individuals who one had the background to do it, but two really have that, you know, resilient nature to work in a public fund like CalPERS. Calstro's just announced recently that their deputy CIO came into the CIO role, and that's Scott Chan and we have a great relationship with Scott and so Stephen will come in. He is coming in from New Zealand.
He starts on July fifteenth, till start at our board's off site. It's a great opportunity for him to understand all of the strategies. He's been already interacting with my team with me and we're thrilled to have him.
Do you have I mean I know that you know ESGDI is still very important to you, as is evidenced by at least in one instance, your.
Fight against Exxon. We're going to talk about that in a second.
Did you feel more pressure to pick a more diverse candidate for CIO?
We don't feel that pressure. We want to make sure that when we are recruiting for any position at CalPERS, that we've reached out to a wide variety of our networks and so for us our workforce, the way that we measure whether we are doing DEI appropriately is that our workforce, the managers who we work with, really need to be reflective of the population of the state of California.
So that diversity is really important. That as you're out recruiting, people want to know that they have that ability to promote within a system like CalPERS.
So we cast a wide net, but what it.
Comes down to is finding the most qualified individual and that is what we found in mister Gilmore.
Calper's CEO, Marci Frost, is still with us and she owns stakes in some of these major oil I would venture to say probably most of the major oil producers. One of them, Marcy is Exon, and there has been a pretty heated fight over some shareholder proposals. Darren Woods and Exon have sued a couple of shareholders for proposals, they backed down, and yet Exon continued on with its lawsuit to try and what stop what it sees as
superfluous proposals being pushed through at agms. You are now going to vote against all twelve directors on the board at the AGM tomorrow and the CEO Darren Woods.
What's happening here?
Well, we believe that it's one first and foremost, it's an absolute governance failure by the Exon board, which is why our vote is against the entire board, including the CEO, Darren Woods. After much interaction with the company itself, including with my investor relations team, a direct conversation that I had with mister Woods a couple of weeks ago. He heard me out, I heard him out. It was a
very thorough discussion. But that the end of that discussion, it was obvious we were not going to reach agreement.
On this litigation.
I actually made a request that they withdraw it. So a couple of facts I think that are really important here is that the proposal at issue was a proposal in twenty twenty three that got ten and a half percent of shareholder approval ten and a half percent. That's the issue they're dealing with, beyond the fact that these are non binding proposals, beyond the fact that they did not go through the sec relief process, the no action process,
and went directly to the court. And so what I think is happening is that they are trying to redefine ordinary business to limit proposals coming from owners of that company around issues related to climate potentially. But I think it is far more implications than just climate. I think it could be, say, on pay, I think it could be independence of board governors or governance. I think this could be a very risky lawsuit to continue with.
If you're an owner.
Now, you only hold I think zero point two percent of x ON stock, but obviously you have gigantic name recognition, and I'm sure you talk with a lot of other large shareholders. How much sway do you think you're going to have with this opposition tomorrow.
So we hold about a billion dollars worth of stock and bombs in our portfolio, so it is a material holding in the portfolio itself. But I think there are longer term implications that if we start saying we're going to restructure or redefine ordinary business than any topic that a company doesn't want to discuss with its owners becomes on the table. So I think what we've seen since we've come out and said how unhappy we are about
this litigation proceeding. You've seen other funds come in. You've seen New York, You've seen Calsters, you've seen Norges, the Sovereign Wealth Fund, you've seen Glass Lewis, which is a proxy voting service provided to other smaller institutions, all coming out with the same concern about the litigation. Now the approach is a bit different. How they want to vote
those shares is a bit different. I believe so far today we're the only ones who say, because this is a governance failure, we're voting against the whole slate of directors, including the three that we voted in on the Engine one one.
Yeah.
In terms of I mean G is, I think the oft forgotten letter in the acronym EESG. Right, it's obviously important to you, the E and the S, also environment and social. How much do you lean into this amidst the backlash that we've seen over the past couple of years, especially some red states, even through legislation, are pushing back against ESG investing.
Yeah, Unfortunately, I think it's become this red state blue state issue.
It's not.
We've never looked at it in that manner. We've always looked at this the last twenty years about risk and return that we're investing over twenty thirty forty year time horizons. Our liabilities, our pension payments are long dated, so the risks that are being identified today are going to be very different than the risks that we see at a macro or micro level happening over time.
So ESG.
However you want to define it, I think there are many definitions out there. We really talk about it with climate and workers and governance of these boards and so we just announced our Sustainable Investing twenty thirty plan and it has the components on energy transition as well as putting more money into diverse managers, diversifying the manager set by which we're allocating capital to start really having the financial markets recognizing the power of diversity, the innovation of
diverse managers equally to the managers who've had traditional access to this capital.
And we believe that those are fiduciary issues.
And you can do this.
I mean, you're raising your allocation to private market investments, Can you continue to have that much impact there as you can in public markets?
We can, we can.
I think the fact that we're moving out of many of those mega buyout funds and the big fund of funds that we're able to go down in that mid market space and we see much more diversification in that mid market space. And we've actually deployed about four billion dollars of ten billion in commitments to diverse managers.
Marcy, great having you with us, Hope you can come back.
Marci Frost, the CEO of Counphers, talking to us about the investments they're making on behalf of workers in America