Pension fund giant CalPERS released its 2014/2015 fiscal year report on Monday, July 13th, and the paltry 2.4% return for the last 12 months is sending shockwaves throughout the pension industry.
Granted it’s just one year, and the three-, five-, 10- and 20-year performance record of CalPERS remains strong, but an annual return less than one-quarter of the five year average return is troubling to say the least. Analysts and retirees alike will be closely watching CalPERS over the next few quarters to see if this was a bad year blip or the start of a troubling trend. Most pension funds expect returns of 7.5 or 8% annually, so 2.4% is extremely low especially with the S&P 500 up almost 7% in the past 12 months.
Of note, CalPERS assets stand at more than $301 billion as of June 30th of this year, and is the largest pension fund in the country.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
More on CalPERS performance
A press release from CalPERS highlights that: “over the past three and five years, has earned returns of 10.9 and 10.7 percent, respectively. Both longer term performance figures exceed the Fund’s assumed investment return of 7.5 percent, and are more appropriate indicators of the overall health of the investment portfolio. Importantly, the three- and five-year returns exceeded policy benchmarks by 59 and 34 basis points, respectively. CalPERS 20-year investment return stands at 7.76 percent.”
In terms of specific investments, CalPERS saw a strong performance from its real estate investments, which represented close to 10% of the total pension fund as of the end of June. Of note, income-generating properties including office, industrial and retail assets returned around 13.5%, outperforming the fund’s real estate benchmark by over 114 basis points. The biggest loss came from forestland, which contributed to
However, global equity represented a much larger 54% of CalPERS investments as of June 30, 2015, and the return on equity investments over the 12 months was a paltry 1%. That compare to benchmark returns of 1.3%. The statement noted the negative factors that impacted global equities included a stronger U.S. dollar across the board and “challenging emerging market local returns”.
Keep in mind that fixed Income is the second largest asset class in the fund, at close to 18% end-June. Fixed income investments produced a return of 1.3%, outstripping its benchmark bond indices by 93 basis points.
Private equity represented around 9% of CalPERS investments at the end of June, and that segment saw strong absolute returns for the year of 8.9%. However, the pension fund’s PE investment benchmark by a disappointing 221 basis points.
Statements from CalPERS executives
“It’s important to remember that CalPERS is a long-term investor, and our focus is the success and sustainability of our system over multiple generations,” commented Henry Jones, Chair of CalPERS Investment Committee, in Monday’s statement.
“Despite the impact of slow global economic growth and increased short-term market volatility on our fiscal year return, the strength of our long-term numbers gives us confidence that our strategic plan is working,” Ted Eliopoulos, CalPERS Chief Investment Officer, noted. “CalPERS continues to focus on our mission of managing the CalPERS investment portfolio in a cost-effective, transparent and risk-aware manner in order to generate returns to pay long-term benefits.”
It looks like it will take more than divesting from hedge funds to turn things around at the pension giant.