Calpers Earns 0.6% as Long-Term Returns Trail Fund’s TargetBy
Stocks dropped 3.4% while forestland assets lost 9.6%
Pension’s investment gains average 5.1% over 10 years
The California Public Employees’ Retirement System, the largest U.S. public pension fund, earned a return of 0.6 percent on its investments last fiscal year, trailing its long-term target as holdings in stocks and forestland lost money.
The pension’s public equity portfolio lost 3.4 percent in the year through June 30 and forestland assets declined 9.6 percent, Chief Investment Officer Ted Eliopoulos said Monday. Fixed-income holdings rose 9.3 percent and infrastructure investments gained 9 percent.
“The longer-term returns of the fund -- the three-, five-, 10-, 15- and 20-year total returns of the fund -- are now below the assumed rate of 7.5 percent for the fund,” Eliopoulos said. “That’s a significant policy issue for us.”
The system must average at least 7.5 percent a year to match its assumed rate of return or turn to taxpayers to make up the difference. Calpers’s annualized returns were 6.9 percent for the last three years, 5.1 percent for the last 10 years and 7 percent over 20 years, according to a presentation to the board. It is among U.S. pensions under pressure to boost investment returns as funding shortfalls increase amid an aging population and low interest rates.
In fiscal 2015, Calpers earned 2.4 percent. The pension lost a quarter of its value in 2009. Two years later, it earned a record 20.7 percent, only to see the gain drop to 1 percent the following year. Since the recession, the fund has sought to better gauge its risks from market volatility.
While the returns have fallen below assumptions, the pension board isn’t scheduled to vote on revising the targets until February 2018. Any changes could affect investment allocations and contribution requirements from government agencies whose employees are covered by the system.
“We have a very formal process,” Eliopoulos said at a news conference Monday. “I and the investment team are comfortable moving forward with the current timetable.”
The system had $295 billion as of June 30 and $302 billion on Monday, according to a Calpers statement.
Stocks made up about 52 percent of the system’s assets as of last month, accounting for their large impact on returns. Fixed-income, such as bonds, totaled 20 percent. Real assets, including real estate, forestland and infrastructure, comprised 11 percent. Private equity was 9 percent. Investments with inflation protection, such as swaps and commodity futures, were 6 percent of the portfolio and had negative returns of 3.6 percent in the year.
“That combination of negative performance by global equity and our inflation asset class were the main drivers of our returns for the fiscal year,” Eliopoulos said.
The gain from fixed-income assets represented “an extraordinary result,” because it happened at a time when interest rates had been expected to rise, he said, but the opposite occurred. Rising rates reduce the value of bond holdings.
“It’s an important reminder of the value of diversification of your portfolio,” Eliopoulos said. “Despite all our efforts and our expert opinion of what might happen in the market from year to year, the results can sometimes surprise your predictions.”
Assets totaled $301.9 billion as of June 30, 2015, and have been reduced as benefit payments outpaced the combination of employee contributions and investing returns. Calpers serves more than 1.7 million members in its retirement system and administers benefits for nearly 1.4 million members and their families in its health program.
The fund was large enough to cover about 76 percent of its liabilities as of June 2014, according to its website, based on assumptions such as employee life expectancy and historical returns on investment.
“It’s important to remember that Calpers is a long-term investor,” Henry Jones, chair of Calpers’s investment committee, said in the statement. "We will continue to examine the portfolio and our asset allocation.”
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