The California Public Employees’ Retirement System (CalPERS), the largest pension fund in the United States reported nearly 16 % returns from its real estate investments for the past 12 months ended last June 30.
According to the press statement released by CalPERS, its real estate revenues generated from office, industrial and real estate properties helped the pension to gain 1 % on its total investments for the past 12 months. Its total asset for FY 2012 is worth $233 billion.
The pension fund also reported 5.4 % gain in private equity, 12.7 % in fixed income, 8.4 % infrastructure and 4 % in liquidity. CaLPERS reported 7.2 %, 11 % and 2 % decrease in public equity, forestland and absolute return assets respectively.
Joe Dear, CalPERS chief investment officer cited the European crisis and the sluggish global economic growth, which increased market volatility and reduced equity returns as the primary factors that brought negative impact to the performance of the fund for the FY 2012.
CalPERS 1 % total investment revenue for the past 12 months is a complete failure. The revenue is far below its yearly target benchmark of 7.5 %. Dear expected observers to view 7.5 % target of the pension fund to be unrealistic due to investment result for this year. He explained, “One percent is below where we would like it to be, but it is well within the range of returns for the kind of portfolio we have.”
Dear believed that the 7.5 % target is achievable. He emphasized that it is important for the pension fund to maintain a realistic outlook, implement and stick to its strategy. According to him, abandoning your strategy when troubles arise is the worst mistake. We do not know how 7.5% is realistic.
In addition, Herny Jones, Chair of CalPERS also pointed out that CalPERS is a long-term investor. According to him, the pension fund’s one year performance should not be used to determine its capability to achieve long-term investment goals. We doubt long term performance will be better with 10 year treasuries at 1.5%. Explain that Mr. Jones.
Bloomberg noted that CalPERs failed to reach its target revenue for the third time this year. Last year was its best performance after gaining nearly 21 % while its worst performance was recorded in 2009 when it lost 23 %.
CalPERS manages the retirement benefits of more than 1.6 million California State, local government, and public school employees, retirees, and their families in behalf of more than 3,000 public employers, and health benefits for more than 1.3 million enrollees.
The average CalPERS pension benefit is $2,332 per month. For those who just retired for the FY 2011, their average pension benefit is $3,065 per month.
As most pension funds state, they will make their 7.5% or 8% return in alternative investments. However, this makes absolutely no sense.
1. caLPERS had a 2% loss from hedge funds in their fiscal year.
2. Hedge funds do not outperform the market. Being part of the market, hedge funds will return the market rate minus their fees (which are very high)
3. CaLPERS will have difficulty finding the best hedge funds to put capital into. With 100s of billions of dollars under management, they will be forced to allocate money to larger hedge funds. We have seen numerous studies which show that smaller hedge funds outperform larger ones. At a point, it becomes difficult for Warren Buffett or David Einhorn to outperform the market. Buffett has stated that he could return more with less money under management
Conclusion: CaLPERS and other pension funds are in big trouble. State Governments ignore the problem because it is too politically and economically difficult to deal with. Like other problems, the can will be kicked down the road, until this becomes a national crisis.