The largest US pension plan, the California Public Employees’ Retirement System, has announced preliminary fiscal year returns of 8.6% for the 12-month year ending June 30.
The net returns, announced in a press release on the $351 billion plus system’s website, were helped by returns of 16.1% in the system $27 billion private equity program and 11.5% in its $172.5 billion public equities asset class.
CalPERS Chief Investment Officer Ted Eliopoulos in the press release credited “strong performance” in the system’s private equity and pubic equity program for allowing the system to exceed its assumed rate of return of 7.375% for the 2017-2018 fiscal year.
While CalPERS exceed the rate of return assumption, it fell slightly short of its own custom policy benchmark by 6 basis points. Public equity underperformed its custom benchmark by 42 basis points while private equty underperformed its benchmark by 250 basis points.
CalPERS officials calculate a 71% funding ratio for the system based on the latest investment returns, up from 68% from the returns as of June 30, 2017.
The future still looks less than certain for CalPERS investment-wise.
The retirement system starting on July 1, 2019 will have lowered its assumed rate of return to 7% based on expectations of lower future investment returns. While CalPERS investment staff and its consultants conclude that the system can earn those average returns on an annualized basis over the next 30 years, the next decade looks like a tougher period according to projections. CalPERS investment staff and consultants expect an average annualized rate of return of around 6.2% over the next decade.
CalPERS third large asset class, its $68.9 billion fixed income program, performed poorly in the last fiscal year. The asset class in the 12-months ending June 30, produced returns of 0.4% though it was 38 basis points above the asset classes custom benchmark.
Results of other assets class were 8% for the retirement plan’s $37.4 billion real assets program, which includes real estate, 9.3% for its $24.3 billion inflation assets program and 1.7% for its $16.5 billion liquidity program.
The real assets program was 119 basis points above its custom benchmark and inflation assets and liquidity were both 37 basis points above their separate custom benchmarks.
Isolating CalPERS $31.2 billion real estate program from the overall real assets program, shows less robust performance. Real estate produced returns of 6.8% for the latest fiscal year, 26 basis points beyond its customer benchmark.
CalPERS overall real assets returns were propped up by its infrastructure program, which returned 20.6% in the fiscal year, 1416 basis points above its custom benchmark. However, the infrastructure program has just $4.2 billion invested, around 0.2% of CalPERS total portfolio.
CalPERS, like other major institutional investors around the world, has made a big push for infrastructure assets, but competition is intense among institutional investors to find those investment assets.
The other component of CalPERS real assets program, its $2 billion forestland program, saw results of 1.9% in the fiscal year ended June 30, 187 basis points below its custom benchmark.
CalSTRS investment staff has been attempting to sell the forestland portfolio for at least several years but has been unable to dispose of the assets with incurring a major loss. The portfolio has been a constant underperformer year after year.
While the performance numbers released by CalPERS are as of June 30, private equity and real estate numbers lag by three months and are as of March 31.
CalPERS latest 8.6% return is below the 2016 fiscal year’s 11.2% return but significantly above the 0.61% return in the 2015 fiscal year.
CalPERS also released long term performance numbers saying as of June 30, fund performance was an annualized 8.1% for the five-year period, an annualized 5.6% for the ten-year period and an annualized 6.1% for the 20-year period.
Longer term investment results are still being impacted by the great financial crisis which saw CalPERS lose around 20% of its overall assets.
After audits, the fund’s final fiscal year investment results will be available at its August board meting, a CalPERS spokesperson confirmed.