.jpg)
The California Public Employees’ Retirement System leaned heavily on its diversification strategy to forestall a large investment loss this past fiscal year, the System reported today. CalPERS funded status remains unchanged.
Preliminary estimates are that it incurred an overall loss of 2.4 percent (before fees) for the year ended June 30, 2008** – reflective of the worldwide economic slowdown and lagging global equity markets. (By comparison, global equity markets worldwide were down by 10.4 percent according to one index measurement*.) CalPERS ended the fiscal year with its market value of assets totaling $239.2 billion.
“It was difficult for any investor to make positive returns in stocks this past year, but we realized gains in other areas, ending the year in good financial shape,” said Anne Stausboll, CalPERS Interim Chief Investment Officer. “Private equity returns led the way in gains. Fixed income and our new inflation-linked asset class were also in positive territory,” she said.
Also cushioning the impact of losses is the fact that CalPERS experienced double digit gains in the last four straight years. On a five year basis, CalPERS returns remain strong – at 11.4 percent – well above the 7.75 percent return objectives to finance liabilities. It has enjoyed a positive return for 21 out of the last 25 years.
In addition, the System’s funding levels remain very strong. The one-year decline in total CalPERS market assets will have no immediate or significant impact in and of itself on California employers’ budgets next year or on the pension fund’s ability to pay benefits.
In previous down markets, flat or negative investment returns contributed substantially to increases in employer contributions the following year. However, CalPERS rate stabilization policies now spread market asset gains and losses over 15 years, thus reducing the volatility of employer rates. The gains that were held back in the past four years under CalPERS “smoothing” policy and applied over 15 years contribute to the stability of employer rates from year to year.
CalPERS was 93 percent funded as of June 2006. When the investment returns applied to the past two fiscal years are factored in, the net effect is that they will roughly cancel each other out, keeping funding levels stable -- considered very good for pension funds.
Equities were the real culprit in holding back positive returns, with CalPERS losses estimated to be 10.7 percent. Even still, CalPERS took action during the year to prevent greater losses. “The U.S. equity market was down 14.8 percent as measured by the Russell 3000 Index,” said Stausboll. “Last fall, we underweighted public stocks, and it played a role in moderating the negative impact of equity returns on our fund,” she said.
The stock markets will rebound, and when they do, CalPERS will be ready. “We are well positioned for the eventual recovery of public markets. We’re moving more money into international sectors and revising our external manager program to enhance returns,” Stausboll said. “Our Board’s decision to change asset allocation last December continues to be the right direction,” she added.
For the 2007-08 fiscal year, CalPERS private equity experienced a 19.6** percent return for the 12 months through March 31. While it is still a small part of the CalPERS portfolio and ramping up, the new Inflation-Linked Asset Class returned 22.9 percent over nine months. Global fixed income assets returned 7.7 percent for the year. Real estate gained 8.1** percent for the 12 months through March 31.
As of June 30, 2008, the Fund’s assets were allocated in the following classes: 51.9 percent for public equities, 24.7 percent for fixed income, 10.3 percent for private equity, 9.9 percent for real estate, 2.0 percent for inflation-linked, and 1.2 percent for cash and cash equivalents.
Final investment returns - plus expenses related to investments – will be submitted to the CalPERS Board of Administration later this year and published in the System’s 2007-08 Comprehensive Annual Financial Report.
Heading into the new fiscal year, the System will be less dependent upon domestic equities. The Board of Administration’s recent asset allocation decisions further diversified the portfolio by creating a new inflation-linked asset class targeted for 5 percent of assets, increasing allocation to private equity by 4 percent, and expanding real estate (with a tilt toward international investing) by 2 percent. These will be funded by reductions in global equity and fixed income.
CalPERS is the nation’s largest public pension fund, providing retirement and health benefits to 1.5 million State and local public agency employees, retirees, and their families. For more information, visit www.calpers.ca.gov.
*MSCI All World Country Index, inclusive of the U.S.
** Real estate and private equity returns are for 12 months ending March 31, 2008 and are subject to change. Pending appraisals in the real estate portfolio will also impact final year end data.
