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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Let's talk about a person who is driving markets all

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Speaker 2: the time. Marcy Frost joins us, the CEO of CalPERS,

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Speaker 2: one of the largest equity holders in the country, in

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Speaker 2: the world.

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Speaker 3: Marshy, thanks so much for joining us.

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Speaker 2: I want to start with just a breakdown of how

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Speaker 2: much you hold and where you're putting it. I think

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Speaker 2: it's something like one hundred and sixty billion dollars in

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Speaker 2: stocks and the majority the lion shares here in North America.

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Speaker 3: Do you think about diversifying.

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Speaker 2: Out as other regions grow Europe, Asia, Africa, or because

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Speaker 2: you represent you know, workers in America, do you want

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Speaker 2: to invest the mass of your money here.

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Speaker 4: So we are a five hundred billion dollar portfolio and

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Speaker 4: just under fifty percent of that is allocated to global equity.

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Speaker 4: So we have really taken more of this tilt to

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Speaker 4: follow where we think capital formation will occur, and some

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Speaker 4: of that tilt has moved us more globally than domestically.

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Speaker 2: So what about in terms of tech investment, because you

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Speaker 2: have a massive chunk there and you've boosted I think

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Speaker 2: your allocation to ship stocks like Nvidia, which have done

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Speaker 2: really well. Does that continue to grow the portion of

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Speaker 2: big tech stocks in your portfolio, or do you start

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Speaker 2: to take profits.

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Speaker 4: Yeah, So most of the global equity portfolio is really

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Speaker 4: done through index funds, So we're holding those companies at

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Speaker 4: the weighting and the index based on the allocation. Where

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Speaker 4: we see more direct investing or direct opportunities will be

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Speaker 4: more on the private assets and how we're deploying capital

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Speaker 4: to venture capital, whether that's a climate technology play, whether

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Speaker 4: that is a climate transition play. But on the public

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Speaker 4: equity side, for the most part, we are just holding

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Speaker 4: the weight of that company in the portfolio.

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Speaker 2: In terms of the private market investments, how big how

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Speaker 2: big of an action is that, because these investments can

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Speaker 2: be fairly opaque, right.

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Speaker 3: I think Chris Ayleman from.

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Speaker 2: Cal Stirs has said it's like a moving bulls eye

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Speaker 2: and you don't know until three years later after you've

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Speaker 2: hit it.

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Speaker 4: Plus they're very expensive, right, So we have we just

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Speaker 4: moved our allocation target to both private equity and private debt.

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Speaker 4: We increase those just back in November, So we're moving

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Speaker 4: from a thirteen percent private equity allocation, moving that up

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Speaker 4: by four and then also increasing our private debt. So

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Speaker 4: there is a bit of opaqueness in private equity. These

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Speaker 4: are private companies portfolio companies, but it's not really opaque

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Speaker 4: to the investor. We can have the same interactions with

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Speaker 4: a GP and a portfolio company that we can have

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Speaker 4: with a public company. So even though the returns on

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Speaker 4: those have been a little slower to capital to be

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Speaker 4: returned to CalPERS, we still have a lot of conviction

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Speaker 4: in the private markets, private debt in particular, and also

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Speaker 4: private equity as we've changed really the way that we've

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Speaker 4: implemented private equity. We have a long history of really

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Speaker 4: investing in the large megafunds, the buy up funds, the

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Speaker 4: fund of funds. We are now with this increased allocation,

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Speaker 4: moving more that into the co investment space, which does

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Speaker 4: not have that feed drag that you mentioned.

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Speaker 2: But you're increasing your allocation in part because you've done

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Speaker 2: so well with those investments in the past. What kind

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Speaker 2: of returns do you expect from private equity and private credit, so.

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Speaker 4: On the private equities part of the portfolio, it's one

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Speaker 4: hundred and fifty bits above what we would get out

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Speaker 4: of regular passive strategy and public equity. Private debt is

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Speaker 4: something that we have a little more connection with and

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Speaker 4: that's ranging somewhere in the seven to ten just depending

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Speaker 4: on market cycle.

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Speaker 3: What about the costs, I mean, we always hear about.

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Speaker 2: The costs for capital and then the profit sharing costs.

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Speaker 2: Two and twenty is the famous number that the retail

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Speaker 2: investor may get. But you're obviously a much bigger presence.

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Speaker 2: Do you have the way to negotiate down those costs?

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Speaker 4: We do have theity to negotiate costs. It a little

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Speaker 4: bit differently than maybe some of our smaller counterparts. But

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Speaker 4: I think what is more important in the strategy as

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Speaker 4: it sits today is the co investments, and we're able to,

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Speaker 4: you know, really pick the managers we want to do

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Speaker 4: business with and then sit alongside them on a co

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Speaker 4: investment deal. We spend a lot more time on manager

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Speaker 4: selection than we do thinking about what a portfolio company

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Speaker 4: or a sector might be. That conviction with a manager

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Speaker 4: is really where we're spending our time.

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Speaker 3: What are you looking for as a manager.

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Speaker 4: So we want someone who has you know, has a

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Speaker 4: track record. We want to work with someone who is

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Speaker 4: transparent with us around how those portfolio companies are being managed.

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Speaker 4: We just instituted labor principles across the portfolio, and in particular,

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Speaker 4: we want to see how our private equity managers will

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Speaker 4: attest and make sure that you know, workers have freedom

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Speaker 4: of association, that workers have rights to safety, that workers

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Speaker 4: have benefits that would be commensurate for the type of

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Speaker 4: work that they're doing, but that they have a safe

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Speaker 4: and healthy workplace. So those labor principles just came in.

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Speaker 4: We're having our GPS our general partners sign on that

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Speaker 4: they attest to largely abide by these principles, and then

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Speaker 4: any new deal would have to be signed on to

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Speaker 4: as well. So we're looking for companies who had value

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Speaker 4: alignment with us, want to do value creation of the

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Speaker 4: long term and understand that we're a public pension fund

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Speaker 4: and there are certain things at a public pension fund

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Speaker 4: based on us representing workers public sector workers that maybe

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Speaker 4: private equity of the past twenty years ago, though some

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Speaker 4: of those practices have had to change over the decades,

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Speaker 4: and I think the gps have been doing a great

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Speaker 4: job there, but we want to make sure that there's

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Speaker 4: value alignment.

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Speaker 2: I imagine it's even more important to get what you

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Speaker 2: want in terms of choosing a chief investment officer. You've

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Speaker 2: just named Steven Gilmour of New Zealand Fund as your

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Speaker 2: next CIO.

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Speaker 3: How difficult was that?

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Speaker 2: I know Cawsters also is looking for a new CIO

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Speaker 2: right and it must be a very competitive space.

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Speaker 1: It is a very competitive space.

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Speaker 4: And when you're thinking about the scale and the public

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Speaker 4: nature of CalPERS, you find yourself in this place where

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Speaker 4: there aren't a lot of truly qualified individuals who one

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Speaker 4: had the background to do it, but two really have that,

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Speaker 4: you know, resilient nature to work in a public fund

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Speaker 4: like CalPERS. Calstro's just announced recently that their deputy CIO

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Speaker 4: came into the CIO role, and that's Scott Chan and

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Speaker 4: we have a great relationship with Scott and so Stephen

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Speaker 4: will come in. He is coming in from New Zealand.

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Speaker 4: He starts on July fifteenth, till start at our board's

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Speaker 4: off site. It's a great opportunity for him to understand

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Speaker 4: all of the strategies. He's been already interacting with my

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Speaker 4: team with me and we're thrilled to have him.

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Speaker 2: Do you have I mean I know that you know

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Speaker 2: ESGDI is still very important to you, as is evidenced

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Speaker 2: by at least in one instance, your.

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Speaker 3: Fight against Exxon. We're going to talk about that in

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Speaker 3: a second.

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Speaker 2: Did you feel more pressure to pick a more diverse

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Speaker 2: candidate for CIO?

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Speaker 4: We don't feel that pressure. We want to make sure

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Speaker 4: that when we are recruiting for any position at CalPERS,

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Speaker 4: that we've reached out to a wide variety of our

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Speaker 4: networks and so for us our workforce, the way that

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Speaker 4: we measure whether we are doing DEI appropriately is that

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Speaker 4: our workforce, the managers who we work with, really need

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Speaker 4: to be reflective of the population of the state of California.

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Speaker 4: So that diversity is really important. That as you're out recruiting,

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Speaker 4: people want to know that they have that ability to

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Speaker 4: promote within a system like CalPERS.

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Speaker 1: So we cast a wide net, but what it.

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Speaker 4: Comes down to is finding the most qualified individual and

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Speaker 4: that is what we found in mister Gilmore.

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Speaker 2: Calper's CEO, Marci Frost, is still with us and she

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Speaker 2: owns stakes in some of these major oil I would

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Speaker 2: venture to say probably most of the major oil producers.

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Speaker 2: One of them, Marcy is Exon, and there has been

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Speaker 2: a pretty heated fight over some shareholder proposals. Darren Woods

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Speaker 2: and Exon have sued a couple of shareholders for proposals,

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Speaker 2: they backed down, and yet Exon continued on with its

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Speaker 2: lawsuit to try and what stop what it sees as

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Speaker 2: superfluous proposals being pushed through at agms. You are now

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Speaker 2: going to vote against all twelve directors on the board

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Speaker 2: at the AGM tomorrow and the CEO Darren Woods.

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Speaker 3: What's happening here?

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Speaker 4: Well, we believe that it's one first and foremost, it's

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Speaker 4: an absolute governance failure by the Exon board, which is

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Speaker 4: why our vote is against the entire board, including the CEO,

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Speaker 4: Darren Woods. After much interaction with the company itself, including

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Speaker 4: with my investor relations team, a direct conversation that I

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Speaker 4: had with mister Woods a couple of weeks ago. He

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Speaker 4: heard me out, I heard him out. It was a

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Speaker 4: very thorough discussion. But that the end of that discussion,

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Speaker 4: it was obvious we were not going to reach agreement.

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Speaker 1: On this litigation.

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Speaker 4: I actually made a request that they withdraw it. So

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Speaker 4: a couple of facts I think that are really important

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Speaker 4: here is that the proposal at issue was a proposal

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Speaker 4: in twenty twenty three that got ten and a half

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Speaker 4: percent of shareholder approval ten and a half percent. That's

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Speaker 4: the issue they're dealing with, beyond the fact that these

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Speaker 4: are non binding proposals, beyond the fact that they did

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Speaker 4: not go through the sec relief process, the no action process,

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Speaker 4: and went directly to the court. And so what I

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Speaker 4: think is happening is that they are trying to redefine

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Speaker 4: ordinary business to limit proposals coming from owners of that

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Speaker 4: company around issues related to climate potentially. But I think

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Speaker 4: it is far more implications than just climate. I think

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Speaker 4: it could be, say, on pay, I think it could

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Speaker 4: be independence of board governors or governance. I think this

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Speaker 4: could be a very risky lawsuit to continue with.

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Speaker 1: If you're an owner.

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Speaker 2: Now, you only hold I think zero point two percent

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Speaker 2: of x ON stock, but obviously you have gigantic name recognition,

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Speaker 2: and I'm sure you talk with a lot of other

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Speaker 2: large shareholders. How much sway do you think you're going

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Speaker 2: to have with this opposition tomorrow.

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Speaker 4: So we hold about a billion dollars worth of stock

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Speaker 4: and bombs in our portfolio, so it is a material

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Speaker 4: holding in the portfolio itself. But I think there are

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Speaker 4: longer term implications that if we start saying we're going

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Speaker 4: to restructure or redefine ordinary business than any topic that

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Speaker 4: a company doesn't want to discuss with its owners becomes

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Speaker 4: on the table. So I think what we've seen since

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Speaker 4: we've come out and said how unhappy we are about

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Speaker 4: this litigation proceeding. You've seen other funds come in. You've

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Speaker 4: seen New York, You've seen Calsters, you've seen Norges, the

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Speaker 4: Sovereign Wealth Fund, you've seen Glass Lewis, which is a

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Speaker 4: proxy voting service provided to other smaller institutions, all coming

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Speaker 4: out with the same concern about the litigation. Now the

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Speaker 4: approach is a bit different. How they want to vote

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Speaker 4: those shares is a bit different. I believe so far

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Speaker 4: today we're the only ones who say, because this is

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Speaker 4: a governance failure, we're voting against the whole slate of directors,

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Speaker 4: including the three that we voted in on the Engine

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Speaker 4: one one.

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Speaker 3: Yeah.

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Speaker 2: In terms of I mean G is, I think the

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Speaker 2: oft forgotten letter in the acronym EESG. Right, it's obviously

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Speaker 2: important to you, the E and the S, also environment

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Speaker 2: and social. How much do you lean into this amidst

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Speaker 2: the backlash that we've seen over the past couple of years,

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Speaker 2: especially some red states, even through legislation, are pushing back

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Speaker 2: against ESG investing.

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Speaker 4: Yeah, Unfortunately, I think it's become this red state blue

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Speaker 4: state issue.

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Speaker 1: It's not.

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Speaker 4: We've never looked at it in that manner. We've always

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Speaker 4: looked at this the last twenty years about risk and

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Speaker 4: return that we're investing over twenty thirty forty year time horizons.

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Speaker 4: Our liabilities, our pension payments are long dated, so the

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Speaker 4: risks that are being identified today are going to be

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Speaker 4: very different than the risks that we see at a

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Speaker 4: macro or micro level happening over time.

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Speaker 1: So ESG.

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Speaker 4: However you want to define it, I think there are

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Speaker 4: many definitions out there. We really talk about it with

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Speaker 4: climate and workers and governance of these boards and so

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Speaker 4: we just announced our Sustainable Investing twenty thirty plan and

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Speaker 4: it has the components on energy transition as well as

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Speaker 4: putting more money into diverse managers, diversifying the manager set

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Speaker 4: by which we're allocating capital to start really having the

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Speaker 4: financial markets recognizing the power of diversity, the innovation of

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Speaker 4: diverse managers equally to the managers who've had traditional access

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Speaker 4: to this capital.

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Speaker 1: And we believe that those are fiduciary issues.

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Speaker 3: And you can do this.

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Speaker 2: I mean, you're raising your allocation to private market investments,

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Speaker 2: Can you continue to have that much impact there as

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Speaker 2: you can in public markets?

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Speaker 1: We can, we can.

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Speaker 4: I think the fact that we're moving out of many

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Speaker 4: of those mega buyout funds and the big fund of

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Speaker 4: funds that we're able to go down in that mid

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Speaker 4: market space and we see much more diversification in that

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Speaker 4: mid market space. And we've actually deployed about four billion

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Speaker 4: dollars of ten billion in commitments to diverse managers.

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Speaker 3: Marcy, great having you with us, Hope you can come back.

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Speaker 2: Marci Frost, the CEO of Counphers, talking to us about

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Speaker 2: the investments they're making on behalf of workers in America