If you're not prepared for low rates, you'll work forever. Have you told your boss?

Mark Todd

Bank of China

Many readers of Livewire will be either managing their own portfolios and want to be informed, or they have outsourced the management of their portfolios and are channelling Don Chipp by reading these articles. If we pooled the entire wealth of the readership and plotted how they invested we would see wildly different approaches to risk and return.

What if for one minute we imagined that CalPERS was an individual looking to manage their portfolio. CalPERS is the California Public Employment Retirement System and has a portfolio that is $389 Billion US dollars so it’s a pretty big portfolio. If we look at their investment strategy and imagine as an investor we mirror their allocation policy how would we go?

In the year ending June 2019 they reported a return of 6.7%, which sounds pretty good. Fixed Income was 9.6% (Thank you Fed!), Private Equity was 7.7% and Public Equity was 6.1%. The problem is that to meet their defined pension expectations they need to return 7.00%, 30 basis points, it isn’t a big miss but it will quickly build up.

A miss of 30 basis points, might mean a slight tightening of the budget belt, but then we get into 2020 and that’s where we might need a lifestyle readjustment. CalPERS for the year ending 2020 returned 4.7%, which they championed as beating their benchmark and beating their peers.

In the GFC many fund managers would crow about the fact that they did not lose as much as their peers forgetting the fact that investors had given them money in the hope that they wouldn’t lose any money in the first place! I recognise the marketing spin but discretion is the better part of valour when you miss some of the greatest calamities to hit markets in decades.

The returns for fixed income was 12.5%; equity 0.60%; private equity -5.1%, and real assets 4.6%. Liquidity was 1.6%. After the rally we have witnessed the challenge is now 2021.

What is the plan for 2021?

Bond and equity markets have rallied strongly in Q2 2020 and now investors need to make a decision on where next to invest. Large institutions such as CALPERS don’t generally pick winners. They spend their time on asset allocation and managing costs.

Macro First

In order to decide on what is the appropriate approach, it is best to come to a conclusion on the environment you are about to invest in.


Interest rates will stay low for years, no central bank in the world can afford to lift rates. No banker will risk any recovery with higher rates, Governments all over the world need to borrow more money that anyone can imagine and Central Banks will do everything in their power to make sure the rate paid is as low as possible. Central Banks and Treasuries are locked in the rates spiral and cannot afford to disengage.


We will live with COVID; economies and countries will adjust to a permanent health crisis, work from home, mask and sanitary precautions will become a way of life. Aged care, travel, logistics, manufacturing and transportation, retail and commercial properties will all be impacted by the need for change from a health perspective.


There is a word limit to most articles. It is best to summarise that the political class of 2020 needs a rethink on how to address modern problems, but assuming no one takes the lead then reform will be a concept, not an act.

The only caveat is a Biden election; the assumption is a Biden election will harm the business environment and be bad for the equity markets. The key to a Biden election is the margin in which the result is decided, if its close, then toxicity and anger will continue, if it is a landslide then it will be a “peoples” election and that has the potential to ignite a very strong consumer-led rally.

Winners Have Won

The dislocation to markets and societies has a sense of permanence, those companies who have benefited from the changes in customer behaviour are probably building moats to sustain that dominance. If you imagine the retail experience and the communication experience in 2021, it will probably involve something via an internet platform.

So follow the winners into 2021.

Asset Allocation for 2021 if we mirror the CalPers approach:

  • Global Equities - 50%
  • Fixed Income - 28%
  • Real Assets - 13%
  • Private Equity - 8%
  • Cash - 1%

It is important to make a disclaimer now, at BOC we don’t provide investment advice and some of the following commentary may be about companies that we have business relationships or investments.

Is the CalPERS asset allocation Fit for purpose?

  • Cash - This should only be a temporary allocation if you are hiding from the market via a large cash holding you should seek better advice as the rate will impact your lifestyle more than is necessary.
  • Global equities - It makes sense to back equities, getting the right mix will be tough and a 50% allocation is a lot. We are being forced into equities because the alternatives are very tough to invest in at the moment. Having such a significant portion in equities should ensure that investors are very targeted in their investments, the companies who have won the COVID battle in all probability will continue to win.
  • Fixed Income - Markets will be volatile, but the only consideration is the commitment of the central banks and while they have a seat at the table the fixed income market will have a bid tone. The hybrid market via an ETF is probably worthy of consideration. Don’t expect a return of greater than 5% from any fund managers.
  • Real Assets - Are not liquid, subject to white noise and easily mispriced, at 13% of the portfolio any investor should have a tactile sense of the opportunity. Real assets are assets you feel, you can touch, they have a story to them that makes sense.
  • Private Equity - The holy grail of investments, it has an aura that is built around performance and exclusivity, CalPERS had allocated 8% and intended to increase if possible. Accessing opportunities and managers is very difficult due to jurisdictional boundaries. Private equity is a global business. Investors who manage or ask others to manage their money need to be sure they understand what the value add the private manager is offering before they invest.


Markets are going to get tougher, returns are going to be leaner, we need to work out how we are going to “live” with COVID. Central Banks and politics will collide throughout 2021 which will mean real rates will be an anchor in portfolios.

Increased allocations in equites come with heightened risk and investors need to either have an exit strategy or be committed to the companies they invest in on the basis they know these companies intimately. Bond markets will continue to grind lower as investor demand and regulatory support continue to drive lower returns from this asset class.

Cash is a rounding error and only useful over a holding phase or to avoid volatility.

If you don't think rates can be permanently here, call anyone you can find in Japan. 

Real rates and private equity should not be more than 20% of the combined portfolio and any investment needs to have an acceptable narrative. 

CalPERS will struggle in 2021, because they need 7% and a portfolio of that size cannot be nimble, readers of these articles can be much more active when the opportunity presents itself, but in terms of a framework, the CalPERS approach with an elevated equity bias could be a good starting point.

P.S. Don Chipp lead the Australian Democrats using the election slogan “Keep the bastards honest

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Head of Fixed Income
Bank of China

Mark joined Bank of China in 2019 as Managing Director and Head of Fixed Income Sales, bringing with him over 25 years’ experience in FICC Sales. Prior to joining BOC, Mark was Head of Core Customers within NAB’s FICC Sales division.

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