CalPERS Investment Returns Are in Negative Territory

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.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

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.”

Tags: CalPERS, investment returns, Pension, Volatility

New York State Comptroller Thomas P. DiNapoli and the Church Commissioners of England are pushing a shareholder resolution against ExxonMobil, with the help of a consortium of other large institutional investors. In total, they have about $1.9 trillion in assets.

The proposal demands the oil giant announce greenhouse gas reduction targets to keep the company’s practices in line with the Paris Accords, which seek to control the global average temperature and reduce its carbon footprint.

“ExxonMobil’s lack of GHG emissions reduction targets puts it at odds with its industry peers that have taken such steps,” said DiNapoli, who is the trustee of the $207.4 billion New York State Common Retirement Fund. “The world is transitioning to a lower carbon future and Exxon needs to demonstrate its ability to adapt or risk its bottom line along with investors’ confidence.”

The resolution wants ExxonMobil to set short-, medium-, and long-term targets for the gas reductions, following in the footsteps of fellow oil barons Royal Dutch Shell and Total, which have begun setting these targets following shareholder engagement from institutions.

For more stories like this, sign up for the CIO Alert newsletter. 

Edward Mason, head of responsible investment for the Church Commissioners, the Church of England’s investment arm, wants the business to “develop a clear strategy for long-term sustainability” while keeping up with the Paris Agreement’s requests. “While we have been pleased to see ExxonMobil start to address the impact of climate change on its business over the past two years, the company has much more to do. Our request would bring Exxon in line with its biggest European peer, Shell, and we believe the board can and should support it.”

The proposal was developed with the expectations of the Climate Action 100+ initiative, a group of global investors pressuring the largest oil organizations to take the action to keep their end of the Paris bargain. The group represents 310 investors with more than $32 trillion in assets under management. It is the largest shareholder engagement initiative on climate change.

“As the use of zero- and low-carbon technology increases due to technical breakthroughs and decreasing costs, and as governments take steps to limit greenhouse gas emissions, fossil fuel companies face enhanced risk,” reads the proposal. “These trends could limit returns to ExxonMobil’s investors by increasing the company’s operating costs or by reducing demand for its products.”

The resolution is expected to be voted on at ExxonMobil’s annual shareholder meeting next spring.

ExxonMobil could not be reached for comment.

Tags: Church Commissioners, ESG, ExxonMobil, New York State Common Retirement Fund (NYCRF), Paris agreement