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Buy and Hold Returns CalPERS to Pre-Recession Heights

CalPERS Chief Investment Officer Joseph Dear at the annual Milken Institute Global Conference in Beverly Hills, Calif., in 2012

Photograph by Jonathan Alcorn/Bloomberg

CalPERS Chief Investment Officer Joseph Dear at the annual Milken Institute Global Conference in Beverly Hills, Calif., in 2012

After more than five years, the California Public Employees’ Retirement System is about to reach the $260 billion in assets it held before the global financial crisis wiped out more than a third of its wealth. The secret to its recovery: persistence. It stuck with its asset allocation, half in stocks, throughout the turbulent years. In other words, it followed the advice wealth managers give individual investors. “We believed the markets were going to come back, and we held our allocation at around 50 percent, and that decision has been justified,” says CalPERS Chief Investment Officer Joseph Dear.

CalPERS, America’s largest public pension, was worth $253.2 billion on Jan. 17, or about 97 percent of its October 2007 pre-recession high. The fund returned 13 percent in 2012, about the same as the Standard & Poor’s 500-stock index. Its recovery slightly outpaces the average of the 100 largest U.S. public pensions, whose total assets fell from $2.9 trillion to $2 trillion from 2007 to 2009, then rebounded to almost $2.8 trillion as of Sept. 30, according to U.S. Census Bureau data. “A lot of the improvements in portfolio returns is simply reflective of the return of the market,” says Dear. “But there is still an important lesson there, which is that when the crisis was full-on, we didn’t drastically reduce our equity exposure.”

The Sacramento-based pension still needs $87 billion to meet its long-term commitments, and has had to ask the state and struggling cities to contribute more. They paid $7.8 billion to the fund in the last fiscal year to cover benefits, almost four times more than a decade earlier. San Bernardino sought bankruptcy protection in August partly because it couldn’t afford its annual $13 million payment to CalPERS. “It’s certainly good news that the asset base has grown and recovered,” says Bradley Belt, senior managing director of the Milken Institute, a Santa Monica (Calif.)-based think tank, and former executive director of the federal Pension Benefit Guaranty Corp. “The bad news is that while you’ve gotten back to where you were on the asset side—through a combination of good market returns and new contributions—liabilities never took a holiday.” The median state pension was 72 percent funded in 2011, down from 83 percent in 2007, according to data compiled by Bloomberg.

In addition to stocks, CalPERS invests about 17 percent of its money in bonds, 14 percent in private equity, 9 percent in real estate, 4 percent in cash equivalents, 4 percent in inflation-linked holdings such as commodities, and 2 percent in forests and infrastructure such as airports and power plants.

In the years following its record losses, the fund embraced more risk controls, accumulated a pool of cash, taught managers to better coordinate among asset classes, and sold off speculative residential housing in favor of rental apartments and more resilient real estate, according to Dear. It also pushed for lower fees and better terms with outside private equity managers, committing $5.2 billion over the last four fiscal years, compared with $36.7 billion over the previous three, according to data provided by the fund. The value of CalPERS’s private equity was up 12 percent for the fiscal year as of Dec. 31, about half its target return. “It takes a long time for a private equity portfolio to reflect decisions to improve it,” Dear says. “Private equity is the case in point that taking a short-term view is like pulling up a carrot to see how it’s growing.”

The bottom line: At $253.2 billion, CalPERS is almost back to its pre-recession high, though it’s still $87 billion short of its long-term commitments.

Marois is a reporter for Bloomberg News in Sacramento.

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