CalPERS PE returns miss benchmark; infra, RE outperform

The chief investment officer of the US’s largest pension emphasised long-term performance over short-term results.

The California Public Employees' Retirement System's infrastructure investments posted a 9.9 percent return, 3.45 percent above its benchmark, for the 12 months ending 30 June, the Sacramento-based limited partner said on Friday.

The $323 billion retirement plan's real assets portfolio, which includes real estate, infrastructure and forestland, returned 7.4 percent, 0.43 percent above its index. CalPERS  created the larger real assets category  in April because the three strategies shared similar investment characteristics.

Real estate outperformed its goal by 0.24 percent, returning 7.6 percent, while forestland returned 1 percent, 2.68 percent below its index.

CalPERS reported a preliminary 11.2 percent return for its overall portfolio, which came in 0.15 percent under its benchmark. Its returns over a five- and 10-year time frame were at 8.8 percent and 4.4 percent, respectively. That same figure was 6.6 percent over a 20-year period. The plan had a funded ratio of 68 percent.

The 2017 fiscal year preliminary results are a noted increase from the returns posted during the previous fiscal year, which amounted to 0.6 percent, according to the  2016 comprehensive annual financial report . The five- and 10-year returns for period ending 30 June 2016 were 6.9 percent and 6.8 percent, respectively.

“We don't get any too excited by any one year of returns; we believe that long-term returns are” more important, chief investment officer Ted Eliopoulos (pictured) said on a media conference call.

The asset-specific returns for alternative investments varied relative to their goals.

Private equity, which includes CalPERS' private credit investments, posted a 13.9 percent return, which was 6.4 percent under its benchmark. Results for the private equity portfolio are through 31 March, as the numbers are delayed by one quarter.

“It's particularly difficult to compare a private asset class against its benchmark which is a public-asset-class benchmark,” Eliopoulos said of the private equity returns. “It generally gives us a mismatch on a one-year basis,” adding that the fund puts an emphasis on longer-term returns, some of which have outperformed CalPERS' public equity portfolio.

The preliminary three- and five-year returns for private equity through 31 March are 8.1 percent and 11.5 percent, respectively. The 10-year return figure stood at 9.3 percent, a CalPERS spokeswoman told sister publication  Private Debt Investor  in an email.

CalPERS announced on Tuesday it is  seeking private equity managers  for its transition manager programme, an effort to give younger managers a chance to compete against larger, more established managers.

To be considered, the general partner must be raising its third, fourth, fifth or sixth institutional buyout or growth equity fund and have more than $1 billion of assets under management as of 31 December. CalPERS will set aside $1 billion for the programme and minimum commitments will be $100 million. Mezzanine debt, fund of funds, farmland and venture capital strategies will not be considered.

The US's largest pension fund appeared to briefly consider cutting its private equity allocation in June when Eliopoulos told the CalPERS board controversy over transparency and fee reporting – along with comments from that same board – was making it difficult to invest in the asset class. Private equity currently makes up 8 percent of CalPERS' portfolio.

Two days later, CalPERS investment committee chair Henry Jones wrote in sister publication Private Equity International that the retirement plan considered that allocation category key to its portfolio, explaining “few investments are as essential to CalPERS' success as private equity”. 

The preliminary return numbers come ahead of a Monday off-site board meeting in which the board will hear thoughts on adjusting how it evaluates leverage across the larger pension fund, which could include coming up with a measurement that can determine the CalPERS exposure on a total fund level.

Currently, CalPERS has its leverage governance policies established at the investment programme level. It may consider elevating those statutes to the fund's trust level, which would appear to provide a more macro picture of the total fund rather than individual investment programmes.

 — Rob Kotecki and Meghan Morris contributed to this report.