The California Public Employees' Retirement System plans to make its first investment in CDOs in the coming months. CalPERS, the U.S.' largest public pension fund, with assets totaling approximately USD136 billion, will likely invest USD25-50 million before year end, according to Mark Anson, cio in Sacramento, Calif.
Anson said CalPERS would invest in the equity tranche of a CDO, because, "you get more bang for your buck." The pension fund already invests in the underlying primary assets and is large enough to diversify its own portfolio so does not want to take unleveraged exposure, he added.
In choosing a deal Anson said, "We are agnostic, we will look at both cash and synthetic. What we are looking for is the best structure."
More pension funds are looking at CDOs to boost their returns and diversify their portfolios, according to Darren Smith, co-head of CDOs at Dresdner Kleinwort Wasserstein in London. CDO equity is suited to pension funds because they are paid up front and given an illiquidity premium. Smith estimated that a diversified pool of CDO equity could give a return in the mid-teens even if there were some defaults, and if credit quality improves that return could jump to 20-30%.