CalPERS Posts Latest Return That Tops Estimates

(November 9, 2010) — The California Public Employees Retirement System (CalPERS) has reported a 13.3% return on its investments for the year ended June 30.

Audited performance through the end of the 2009-10 fiscal year for all asset classes brought the largest US pension fund’s total market value to $200.5 billion, or $500 million higher than reported last July. At that time, returns for real estate, private equity, infrastructure and forestland were available only for the 12 months ending March 31, 2010.

CalPERS revealed that it saved almost $300 million as a result of fee reductions with external managers, while removing low-performance funds from its portfolios as it invests in improved risk-management tools. It has also been successful in advocating several federal financial market regulatory reforms to help guard against the financial crisis. According to the latest figures, global fixed income returned 20.35%; private equity, 23.88%; public equities, 14.42%; and commodities, infrastructure, forestland and inflation-linked bonds returned a combined 8.7%. Real estate assets returned -10.76%.

Separately, CalPERS revealed that its investment committee has OKed a new framework for allocating its assets, following its research into a new asset allocation method based on risk exposure. The fund has combined public and private equities into a new growth classification while moving Treasuries into a new liquidity category. Additionally, it has reportedly created two new classifications: 1) real assets (infrastructure, forestland and real estate) and 2) inflation-linked assets (commodities, TIPS and inflation-linked bonds).

“This is much more of a beginning than an end in terms of reorienting how we think about risk in the portfolio and applying a new set of frameworks to that task,” said Chief Investment Officer Joe Dear. “It opens up a lot of possibilities in terms of how we navigate going forward. What we’ve done now is taken a turn that will allow CalPERS to reclaim its reputation as a thought leader and to apply the best thinking and our best judgment to the challenging questions about how to uphold the promises we made to our beneficiaries to make their retirement secure.”

While no definite allocations for 2011 and beyond have been adopted and won’t be until December 13, according to CalPERS spokesman Clark McKinley, the system has reportedly discussed an allocation of 16% to fixed income, 13% to real assets, 4% to inflation-linked and liquidity, which will also include cash, under the new classification. CalPERS chief investment officer Joseph Dear said at a meeting today at the fund that the new classification scheme will allow the fund to provide board members with a better perspective of portfolio risk, creating a framework for hedging portfolios (for liability and inflation).

Yet, “it’s a little early to reach conclusions on what the CalPERS investment strategy might look like,” McKinley told aiCIO. “The main takeaway is that the new framework gives us a better way to look at risk and take into account what’s happening in the markets based on how much we’re putting into different assets,” he said, adding that the new classification is simply a strategy for re-categorizing assets. “It doesn’t necessarily mean there will be a significant shift in where the money goes. It helps create better tools to understanding the risk we face and enables our investment officers to give the Board a more detailed understanding of the challenges and opportunities the fund faces,” McKinley said.

CalPERS has been researching alternative asset classification since March.