CalPERS CIO: 7.75% Investment Return Will Be a Stretch 'For the Next Few Years'

(September 29, 2011) — With a weak recovery in the United States and a worsening debt crisis in Europe, the California Public Employees’ Retirement System (CalPERS) has said that its 7.75% return may be tough to meet.

CalPERS, the largest public pension in the US, assumes it will earn an average of 7.75% annually to meet its obligations. In an interview with Bloomberg Television, CalPERS CIO Joe Dear said: “That’s going to be tough this year and maybe for the next few years. This low-return environment is structurally driven, and there’s not a lot of policy to move it.”

Spurred by gains in stocks and private equity, the fund earned 20.7% in the 12 months ended June 30 — reflecting its best result in 14 years. Returns over the 20-year period were 8.4%, surpassing the 7.75% target.

In an interview with aiCIO featured in its Summer Issue, Dear commented on the fund’s stellar returns, saying: “Honestly, and not taking anything away from the team here, our 20.7% returns in fiscal 2011 were largely the result of market beta. Public equities are about half our $234 billion portfolio, and it is no secret that public equities significantly increased in value over the past year.”

Dear asserted that the California pension has positioned its portfolio defensively with an underweight toward equities of 4% and a slight underweight in fixed-income. Meanwhile, the scheme is overweight in both private equities and absolute return. “About 14% of our assets are in private equity, and we beat our program benchmark by about 500 basis points,” Dear told aiCIO in July. “In terms of inflation-linked assets—including infrastructure, commodities, forestland, inflation-linked bonds—the only detractor was real estate, which was 970 basis points under its benchmark. It still earned 10%, however. We maintain a slight overweight in equities, underweight in real estate, so that helped.”

Compared to CalPERS’ 7.75% target return, a February study by Wilshire Associates showed that nationwide, state pensions will earn a median annual return of 6.5% in the next 15 years.

Summarizing his perspective on CalPERS’ 2011 investment return and his future outlook, Dear told aiCIO: “Obviously, a 20% return undermines the statements of public pension fund critics—that we are unable to reach our target. I think that’s important—that there is still a lot of earning power in these assets—but let’s be clear: There won’t be a string of 20% years in a row. However, it definitely should boost confidence in the ability to operate a sophisticated portfolio successfully within the public sphere.”

Click here to read an exclusive interview with two of the most influential chief investment officers in America – Chris Ailman of CalSTRS and Joe Dear of CalPERS.