CalPERS Investment Returns Are in Negative Territory

The largest US pension plan—and smaller ones across the country—are affected by market volatility that has lowered investment returns.

The investment returns for the California Public Employees’ Retirement System (CalPERS) are in the red so far for the 12-month fiscal year that began on July 1, as slumping returns are occurring across asset classes, says acting Chief Investment Officer Eric Baggesen.

The results for the $345.6 billion pension plan, the largest in the United States by assets, are considered a bellwether for other public plans, almost all of which work on a July 1 to June 30 fiscal year. With many plans unfunded, if the investment returns don’t reverse, the 2018-2019 fiscal year could be the worst for pubic pension plans since the great financial crisis, adding to unfunded liabilities that total almost $2 trillion.

Baggesen didn’t given exact investment returns in detailing the low investment numbers to the CalPERS Investment Committee on Dec. 17, but CalPERS data from July 1 through Nov. 30 shows that the system lost overall a 1.9% during the five-month period.

The data does not include major price drops that have hit equities particularly hard since mid-November. The S&P 500 dropped 2.8% on Monday and declined more than 5% in the last 30 days.

Among CalPERS’s major asset classes seeing drops during the first five months of the fiscal year, the $165.8 billion global equity portfolio lost 2.6%, the $91 billion fixed-income portfolio lost 2.2%, and the $11.4 billion inflation-sensitive asset class, which is made up of inflation-linked bonds and commodities, lost 3%.

“Around the globe, economic activity has been softening a bit,” Baggesen said. “When you couple that with rates increases in the United States, you create a bit of fear that perhaps we are headed to the next recession. We have absolutely no ability to predict when that may happen, but the markets being a discounting mechanism, are already anticipating that, and that’s showing up obviously in the weakness that we’re seeing in the financial marketplace.”

Not all CalPERS asset classes had negative returns in the five-month period. CalPERS’s $27.8 billion private equity asset class saw returns of 5.8% while the $39.5 billion real assets portfolio, which incudes real estate, saw returns of 0.9%.

Baggesen, however, told the investment committee that the private equity and real estate asset classes lag by several months the returns of the rest of the CalPERS portfolio, so the returns being reported are likely inflated, and could be affected like the other asset classes.

“We would not be surprised to see those assets marked down in value, or maybe not in the negative territory, but certainly the valuations would probably weaken as time goes along,” he said.

This fiscal year’s market volatility is a switch from 2017-2018 fiscal year.

CalPERS reported an 8.6% net return in the 12-month fiscal year ending June 30, 2017,  which was helped by global equity returns of 11.5%.

“That’s a sobering shift, if you will, from the status at the end of the last fiscal year, virtually all segments of the public markets have declined,” Baggesen said.

CalPERS Investment Committee member Richard Costigan said at the Dec. 17 meeting the only “bright spot” looking ahead for CalPERS was real estate returns. However, if the feds raise rates on Wednesday as expected, it could result in marketplaces like “Los Angeles, Seattle, Miami, Las Vegas, Fresno, beginning to cool.”

Baggesen agreed that a rate hike could have a negative  effect on the real estate portfolio’s investment returns.

CalPERS only has a funded ratio of 71% and hundreds of towns, cities, and special districts that are part of the pension plan are already facing contribution increases of up to 20% because of long-term subpar investment returns. This is combined with the fact that the number of CalPERS retirees is increasing compared to the number of active members making payments, creating cash shortfalls for the plan.

CalPERS returned 8.1% for the five-year period ending June 30, but 5.6% for the 10-year period, and 6.1% for the 20-year period.

CalPERS is in the process of lowering its return expectations from 7.5% to 7%. Baggesen said the market may turn around before CalPERS ends its fiscal year next June 30.

“We just have absolutely no way to predict that,” he said, “but we do think that people need to understand that as we stand right now, the fund return is negative, and if that were to flatline from now to the end of the fiscal year, that would be quite a shortfall against our assumed rate of return, with all of the impacts that that would bring with it.”

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